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Budget Deficits and Current Account in Japan and the U.S.: An Empirical Evidence on the Twin Deficits Hypothesis

  • Yoichi Matsubayashi

    ()

    (Graduate School of Economics, Kobe University)

This paper theoretically examines the mechanism of the occurrence of gtwin deficitsh, which means that the budget balance influences the current account, and quantitatively analyzes the probability of the occurrence. Specifically, the author studies the cases of Japan and the U.S. to demonstrate that changes in liquidity constraint in households play an important role in the occurrence of twin deficits. The quantitative analysis indicates that Japan is likely to have had the mechanism where the deteriorating budget balance negatively influenced the current account in the 1990fs, but not as far as turning it into a deficit. On the other hand, in the U.S., the rapid expansion of the budget deficits since 2007 seems to have deteriorated the current account, which implies the occurrence of twin deficits.

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Paper provided by Graduate School of Economics, Kobe University in its series Discussion Papers with number 1010.

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Length: 22pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:koe:wpaper:1010
Contact details of provider: Web page: http://www.econ.kobe-u.ac.jp
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  1. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
  2. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
  3. Michel Normandin, 1996. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Macroeconomics 9607001, EconWPA.
  4. Jeffrey A. Rosensweig & Ellis W. Tallman, 1991. "Fiscal policy and trade adjustment: are the deficits really twins?," Working Paper 91-2, Federal Reserve Bank of Atlanta.
  5. Ogawa, Kazuo, 1990. "Cyclical variations in liquidity-constrained consumers: Evidence from macro data in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 4(2), pages 173-193, June.
  6. Gruber, Joseph W., 2004. "A present value test of habits and the current account," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1495-1507, October.
  7. Matsubayashi, Yoichi, 2006. "Structural and cyclical movements of the current account in Japan: An alternative measure," Japan and the World Economy, Elsevier, vol. 18(4), pages 545-567, December.
  8. Michele Cavallo, 2005. "Understanding the twin deficits: new approaches, new results," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul22.
  9. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
  10. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
  11. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
  12. Afonso, António & Rault, Christophe, 2008. "Budgetary and external imbalances relationship: a panel data diagnostic," Working Paper Series 0961, European Central Bank.
  13. Lori Leachman & Bill Francis, 2002. "Twin Deficits: Apparition or Reality?," Applied Economics, Taylor & Francis Journals, vol. 34(9), pages 1121-1132.
  14. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2004. "Current accounts dynamics in OECD and EU acceding countries - an intertemporal approach," Working Paper Series 0311, European Central Bank.
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