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

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  • Yoichi Matsubayashi

    (Graduate School of Economics, Kobe University)

Abstract

This paper theoretically examines the mechanism of the occurrence of gtwin deficits h, 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 1990 fs, 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.

Suggested Citation

  • Yoichi Matsubayashi, 2010. "Budget Deficits and Current Account in Japan and the U.S.: An Empirical Evidence on the Twin Deficits Hypothesis," Discussion Papers 1010, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:1010
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    More about this item

    Keywords

    Current Account; Budget Deficits; Twin deficits; Liquidity Constraint;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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