The Role of Fiscal Policies for External Imbalances: Evidence from the European Union

REM Working Paper 0162-2021

27 Pages Posted: 18 Feb 2021

See all articles by António Afonso

António Afonso

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

José Coelho

ISEG Lisbon School of Economics and Management,Universidade de Lisboa

Date Written: February 9, 2021

Abstract

We revisit the relation between budget deficits and current account deficits for 28 European Union countries from 1996 to 2019. We find that an increase in budget deficit of 1 pp of GDP results in a deterioration of the current account deficit of 0.318 pp of GDP, which supports the Twin Deficits Hypothesis. On the other hand, dynamic panel estimates partially corroborate the Equivalence Ricardian Hypothesis in the presence of a fiscal rules index. In addition: i) the relation between the two deficits is asymmetric and the negative impact of the recent Eurozone banking and sovereign debt crisis on the current account balance is observed; ii) after 2010, the budget balance positively affects the current account balance; and iii) the positive impact of the budget balance on the current account balance is higher in the cases of non-Eurozone countries, high budget deficit countries, and low exports countries, whereas it is lower in the cases of Eurozone countries, low budget deficit countries, and high exports countries.

Keywords: budget deficit, external deficit, European Union, fiscal rules, panel data

JEL Classification: F32, F41, H62, C33

Suggested Citation

Afonso, António and Coelho, José, The Role of Fiscal Policies for External Imbalances: Evidence from the European Union (February 9, 2021). REM Working Paper 0162-2021, Available at SSRN: https://ssrn.com/abstract=3782469

António Afonso (Contact Author)

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

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

HOME PAGE: http://https://www.iseg.ulisboa.pt/

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/

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/

José Coelho

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

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

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