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The Relationship between Fiscal and Current Account Imbalances in OECD Economies

Author

Listed:
  • António Afonso
  • Philemon Kwame Opoku

Abstract

This study re-examines the nexus between the fiscal balance and the current account balance for 18 OECD countries for the period 1995Q1 to 2018 Q1 using panel cointegration, and panel vector autoregressive (VAR) methods. Our results indicate that a strengthening in the fiscal balance by one percentage point of GDP leads to an improvement in the current account balance of about 0.1-0.3 percentage point of GDP. On the other hand, an increase in real government consumption generally leads to a deterioration in the current account balance. The impact of the real effective exchange rate is not statistically significant. The findings also confirm that there is a long-run relationship between the fiscal balance and the current account balance.

Suggested Citation

  • António Afonso & Philemon Kwame Opoku, 2018. "The Relationship between Fiscal and Current Account Imbalances in OECD Economies," Working Papers REM 2018/61, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
  • Handle: RePEc:ise:remwps:wp0612018
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal imbalances; Current account; Twin-deficit; Panel analysis;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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