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Assessment of the Impact of Fiscal Policy on the Current Account – the Twin Deficit Hypothesis in the Case of Macedonian Economy

Author

Listed:
  • Vesna Stojcevska

    () (National Bank of the Republic of Macedonia)

  • Mite Miteski

    () (National Bank of the Republic of Macedonia)

Abstract

For a small open economy with fixed exchange rate regime, the twin deficit hypothesis is always an interesting and relevant research topic. The aim of this research is to evaluate the effects of the government budget shocks on the current account movement in the case of the Macedonian economy, hoping to shed light on the influence of the fiscal policy on the external position of the economy, as well as to provide useful guidance for policy makers about the sensitivity of the current account balance to changes in the primary budget balance. By using a VAR model on quarterly data for the period from 1998 to 2013, this paper points to a positive relationship between the two balances, but the empirical results also indicate that connection is only contemporaneous, implying that fiscal policy stance does not cause long lasting changes in the balance of payments position of the Macedonian economy. However, our results do not undemand the need for fiscal cautiousness, especially in an economy with a fixed exchange rate regime.

Suggested Citation

  • Vesna Stojcevska & Mite Miteski, 2016. "Assessment of the Impact of Fiscal Policy on the Current Account – the Twin Deficit Hypothesis in the Case of Macedonian Economy," Working Papers 2016-01, National Bank of the Republic of Macedonia.
  • Handle: RePEc:mae:wpaper:2016-01
    as

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    References listed on IDEAS

    as
    1. António Afonso & Christophe Rault, 2008. "Budgetary and External Imbalances Relationship : a Panel Data Diagnostic," Working Papers Department of Economics 2008/45, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    2. Mauro, Paolo & Romeu, Rafael & Binder, Ariel & Zaman, Asad, 2015. "A modern history of fiscal prudence and profligacy," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 55-70.
    3. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2008. "The Effects of Public Spending Shocks on Trade Balances and Budget Deficits in the European Union," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 414-423, 04-05.
    4. Francisco de Castro & Laura Fernández, 2013. "The Effects Of Fiscal Shocks On The Exchange Rate In Spain," The Economic and Social Review, Economic and Social Studies, vol. 44(2), pages 151-180.
    5. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
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    More about this item

    Keywords

    Government Budget Deficit; Balance of Goods and Services; Real Exchange Rate; Twin Deficit Hypothesis; VAR;

    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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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