New Evidence on the Asymmetric Linkages Between Fiscal and Current Account Balances

Nikolina Kosteletou (), Panagiotis Palaios and Evangelia Papapetrou
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Nikolina Kosteletou: National and Kapodistrian University of Athens
Panagiotis Palaios: National and Kapodistrian University of Athens
Evangelia Papapetrou: National and Kapodistrian University of Athens

Journal of the Knowledge Economy, 2023, vol. 14, issue 4, No 23, 4145-4169

Abstract: Abstract The paper presents empirical evidence on the relationship between current account and fiscal balance for Portugal, Ireland, Italy, Greece, and Spain during the last two decades, by applying a threshold autoregressive methodology initially developed by Enders and Siklos (Journal of Business and Economic Statistics, 19(2), 166–176, 2001) and further developed by Sun (Forest Policy and Economics, 13(6), 479–487, 2011). Our empirical findings show that, first, the relationship between current account and budget balance is characterized by non-linearities, and there is evidence of an asymmetric adjustment within the framework of a long-term cointegration relationship. Second, in the long run, a restrictive fiscal policy is the proper tool for improving the current account balance and the growth prospect for all countries under consideration. Third, in the short run, the adjustment process after a shock takes place, primarily, through the level of the current account, while the budget balance evolves more independently, thus acting as the exogenous variable.

Keywords: Fiscal balance; Current account balance; Asymmetric cointegration analysis; Fiscal consolidation; Growth (search for similar items in EconPapers)
JEL-codes: C22 E62 F32 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s13132-021-00824-8

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