Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)
Fiscal Rules and Twin Deficits: The Link between Fiscal and External Balances
(), Aurélien Fichet de Clairfontaine
() and Wolf Heinrich Reuter
Abstract: This paper investigates the relationship between
countries' fiscal balances and current accounts with an emphasis on the
role of fiscal rules. The direct effect of fiscal policy on the current
account via aggregate (import) demand is potentially amplified by indirect
effects, materializing through interest rate effects and inter-generational
transfers that reduce savings. On the other hand, the implied positive
relation between fiscal and external balances is potentially attenuated by
offsetting changes in savings through Ricardian equivalence considerations.
We expect this attenuation effect to be stronger in countries with more
stringent fiscal rules and test this hypothesis using a panel of 73
countries over the period 1985-2012. As previous studies we find a positive
effect of fiscal balances on the current account, supporting the twin
deficit hypothesis. However, the effect of fiscal balances on the current
account depends on the stringency of fiscal (budget balance or debt) rules
in place; it is reduced by one third on average and virtually eliminated
for countries with the most stringent fiscal rules.
Keywords: Twin Deficits, Fiscal Policy, Fiscal Rules, Current Account; (follow links to similar papers)
JEL-Codes: E62,; F32,; F41; (follow links to similar papers)
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design Joakim Ekebom