Fiscal Consolidation and the Current Account: OECD Evidence

Christian Breuer and Chang Woon Nam

No 8071, CESifo Working Paper Series from CESifo

Abstract: We apply a “new” conventional (CAPB-based) measure of fiscal policy, which is less prone to endogeneity issues, and find that a 1-percent of GDP fiscal consolidation leads to the improvement of the current account-to-GDP ratio by approximately 0.8 percent of GDP, while previous research based on conventional measures found a relationship of only 0.1-0.3 percentage points. We suggest that previous results based on conventional measures are biased towards underestimating the twin-deficit linkage because of endogeneity issues and the failure to adjust the CAPB for cyclical effects. After adjustment, the twin-deficit effect is particularly pronounced in the case of expenditure cuts and in Eurozone countries. These findings are in line with previous evidence based on narrative measures.

Keywords: fiscal adjustment; current account; twin deficit; Eurozone countries (search for similar items in EconPapers)
JEL-codes: E62 E63 H50 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Fiscal Consolidation and the Current Account: OECD Evidence (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8071

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