Fiscal Policies, the Current Account and Ricardian Equivalence

29 Pages Posted: 22 Sep 2008

See all articles by Christiane Nickel

Christiane Nickel

European Central Bank (ECB)

Isabel Vansteenkiste

European Central Bank (ECB)

Date Written: September 22, 2008

Abstract

This paper analyses the empirical relationship between fiscal policy and the current account of the balance of payments and considers how Ricardian equivalence changes this relationship. To do so, we estimate a dynamic panel threshold model for 22 industrialised countries in which the relationship between the current account and the government balance is allowed to alter according to the government debt to GDP ratio. The results show that for countries with debt to GDP ratios up to 90% the relationship between the government balance and the current account is positive, i.e. an increase in the fiscal deficit leads to a higher current account deficit. For very high debt countries this relationship however turns negative but insignificant, suggesting that a rise in the fiscal deficit does not result in a rise in the current account deficit. Implicitly this result suggests that households in very high debt countries tend to become Ricardian. Estimating the same model for the 11 largest euro area countries shows that the relationship between the government balance and the current account turns statistically insignificant when the debt to GDP ratio exceeds 80%.

Keywords: Fiscal policy, current account, panel threshold model

JEL Classification: F32, E62, F41

Suggested Citation

Nickel, Christiane and Vansteenkiste, Isabel, Fiscal Policies, the Current Account and Ricardian Equivalence (September 22, 2008). ECB Working Paper No. 935, Available at SSRN: https://ssrn.com/abstract=1243262

Christiane Nickel (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Isabel Vansteenkiste

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
329
Abstract Views
1,630
rank
116,085
PlumX Metrics