Current account adjustments in OECD countries revisited: The role of the fiscal stance

Anastasia Theofilakou and Yannis Stournaras

Journal of Policy Modeling, 2012, vol. 34, issue 5, 719-734

Abstract: This paper revisits the adjustment path of key economic and financial indicators during large current account adjustment episodes in OECD countries, after controlling for discretionary fiscal policy behavior. We find that the drivers of current account deficit reversals differ according to the fiscal policy stance. In economies with expansionary fiscal policies, external sector adjustment is driven by cyclical and credit factors. In economies implementing fiscal consolidation, adjustment is triggered by fiscal and financial factors, while the disruptive effects of the adjustment are smaller. We conclude that fiscally challenged economies facing external imbalances could ameliorate the adjustment path through fiscal consolidation policies.

Keywords: Fiscal policy; Current account adjustment; Event study analysis; Multinomial discrete choice modeling (search for similar items in EconPapers)
JEL-codes: C25 E62 F32 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:34:y:2012:i:5:p:719-734

DOI: 10.1016/j.jpolmod.2011.12.001

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