The Relationship Between Fiscal and Current Account Imbalances in OECD Economies

REM Working Paper 061-2018

37 Pages Posted: 19 Dec 2018

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

Philemon Kwame Opoku

ISEG Lisbon School of Economics and Management,Universidade de Lisboa

Date Written: November 29, 2018

Abstract

This study re-examines the nexus between the fiscal balance and the current account balance for 18 OECD countries for the period 1995Q1 to 2018Q1 using panel cointegration, and panel vector autoregressive (VAR) methods. Our results indicate that a strengthening in the fiscal balance by one percentage point of GDP leads to an improvement in the current account balance of about 0.1-0.3 percentage point of GDP. On the other hand, an increase in real government consumption generally leads to a deterioration in the current account balance. The impact of the real effective exchange rate is not statistically significant. The findings also confirm that there is a long-run relationship between the fiscal balance and the current account balance.

Keywords: Fiscal Imbalances, Current Account, Twin-Deficit, Panel Analysis

JEL Classification: C32, C40, E62, H62

Suggested Citation

Afonso, António and Opoku, Philemon Kwame, The Relationship Between Fiscal and Current Account Imbalances in OECD Economies (November 29, 2018). REM Working Paper 061-2018, Available at SSRN: https://ssrn.com/abstract=3293120 or http://dx.doi.org/10.2139/ssrn.3293120

António 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.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

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

HOME PAGE: http://uece.rc.iseg.ulisboa.pt/

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

Philemon Kwame Opoku

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

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