Consolidation first - About twin deficits and the causal relation between fiscal budget and current account imbalances

Matthias Hartmann () and Helmut Herwartz ()
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Helmut Herwartz: Department of Econonomics, University of Göttingen

Economics Bulletin, 2012, vol. 32, issue 4, 3313-3319

Abstract: During recent years, large trade- and budget deficits have accumulated especially in advanced economies. This study examines if this coincidence actually reflects a causal relation. Economic theory and previously documented findings on causality between trade and government balances are inconclusive. Summarizing evidence over a cross section of 19 advanced economies, we document that the budget balance influences the current account in a more pronounced way than vice versa. Moreover, the documented causal influence is characterized by a stronger tendency towards a twin deficit (or -surplus) rather than a twin divergence.

Keywords: Fiscal policy; trade imbalances; Granger causality; forecasting (search for similar items in EconPapers)
JEL-codes: F3 H6 (search for similar items in EconPapers)
Date: 2012-12-03
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ebl:ecbull:eb-12-00823

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