International Economics

<< N°158

Issue Q2 2019  
Are “twin deficits” asymmetric? Evidence on government budget and current account balances, 1870–2013  
Georgios Karras
Using data from seventeen countries over the period 1870–2013, we first find that there is robust empirical support for the “twin deficits” hypothesis: under the assumption of symmetry, a change in the budget deficit by 1% of GDP causes the current account balance to move in the opposite direction by a maximum of about 0.25% of GDP, an effect that is found to be persistent but temporary. To relax symmetry, the current account is next allowed to respond differently to positive and negative budget shocks. The findings suggest that the full time period is adequately described by symmetry: the current account effects of fiscal expansions are not statistically different from those of fiscal consolidations. The postwar period, however, appears to be decidedly asymmetric: negative shocks to the budget deficit are associated with sizable improvements in the current account, while positive shocks have no statistically significant effect. Policy implications outline a clear but limited role for fiscal policy in influencing the current account.

Twin deficits ; Budget deficit ; Current account ; Keywords
E62 ; F41 ; JEL classification
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