60%, -4% and 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments

REM Working Paper 196-2021

31 Pages Posted: 24 Sep 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: September 20, 2021

Abstract

We study the relationship between the budget balance and the current account balance for European Union (EU) countries, using quarterly data from 1995 to 2020. Through the use of panel Granger causality tests and a panel SUR model, we conclude that the relationship is bi-directional for the EU panel as a whole. We find that, before 2010, the impact of the budget balance on the current account balance is greater in Eurozone countries, for those countries with an average current account balance-to-GDP ratio outside the range of -4 to 6%, and also in countries whose average debt-to-GDP ratio is greater than 60%. Conversely, in non-Eurozone countries, after 2010, the impact of the fiscal balance on the current account balance is less relevant in countries with a current account balance-to-GDP ratio of -4 to 6%, and also in countries with an average debt-to-GDP ratio of less than 60%.

Keywords: budget deficit, external deficit, European Union, panel data, time series

JEL Classification: F32, F41, H62, C32, C33

Suggested Citation

Afonso, António and Coelho, José, 60%, -4% and 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments (September 20, 2021). REM Working Paper 196-2021, Available at SSRN: https://ssrn.com/abstract=3927359

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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