Twin Deficits Revisited: A Role for Fiscal Institutions?

REM Working Paper 031-2018

41 Pages Posted: 22 Mar 2018  

Antonio Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics)

Florence Huart

Université de Lille I

João Tovar Jalles

International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Piotr Leszek Stanek

Cracow University of Economics

Date Written: March 17, 2018

Abstract

We revisit the twin deficit relationship for a sample of 193 countries over the period 1980-2016, using a panel fixed effect (within-group) estimator, bias-corrected least-squares dummy variable, system GMM, and common correlated effects pooled estimation procedures. The analysis accounts also for the existence of fiscal rules in place, their features, and their interaction with the budget balance. In the absence of fiscal rules, the twin deficit hypothesis is confirmed. The size of the estimated coefficient on the budget balance is between 0.68 and 0.79. However, the existence of fiscal rules strongly reduces the effect of budget balance on the current account balance (the coefficient is reduced to 0.1). In fact, the twin deficits relationship does not hold with some specific kinds of rules: debt rules, rules with monitoring of compliance, as well as budget balance rules and debt rules in emerging market economies and lowest income countries, and in the post-crisis period.

Keywords: current account, fiscal balance, fiscal rules, panel data, system GMM

JEL Classification: E62, F32, F41, H87

Suggested Citation

Afonso, Antonio and Huart, Florence and Jalles, João Tovar and Stanek, Piotr Leszek, Twin Deficits Revisited: A Role for Fiscal Institutions? (March 17, 2018). REM Working Paper 031-2018. Available at SSRN: https://ssrn.com/abstract=3142627 or http://dx.doi.org/10.2139/ssrn.3142627

Antonio Afonso (Contact Author)

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
Lisbon, 1248-078
Portugal
+351 21 392 5985 (Phone)
+351 21 396 6407 (Fax)

HOME PAGE: http://www.iseg.utl.pt/~aafonso/AAWeb.html

UECE (Research Unit on Complexity and Economics)

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://www.iseg.utl.pt/~uece/

Florence Huart

Université de Lille I ( email )

Cité scientifique
Villeneuve d'Ascq Cedex, 59655
France
33 (0)3 20 33 59 98 (Phone)
33 (0)3 20 43 66 55 (Fax)

HOME PAGE: http://florence-huart.univ-lille1.fr/

João Tovar Jalles

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

Piotr Leszek Stanek

Cracow University of Economics ( email )

ul. Rakowicka 27
Krakow
Poland

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