UK fiscal policy and external balance under Bretton Woods: twin deficits, or distant relatives?

Josh Banerjee

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The United Kingdom (UK) is typically regarded as the sine qua non case of an economy experiencing chronic external imbalances under the post-war Bretton Woods system, apparently unable to reconcile the divergent objectives of robust economic growth and current account equilibrium. This paper investigates the famed ‘twin deficits hypothesis’, which ascribed responsibility for the UK's current account woes to an excessively lax fiscal policy. Calling on two distinct approaches to identifying fiscal shocks, we find evidence decisively against the traditional twin deficits view, and uncover serious shortcomings in the way that both policymakers and academics conceptualized the transmission of fiscal policy to the current account. Our results demonstrate that factors other than fiscal policy are of considerably greater importance for understanding the UK's historical experience, and we elaborate on the need for a reappraisal of some classic policy debates concerning external adjustment under the Bretton Woods system.

Keywords: current account adjustment; fiscal policy; policy coordination (search for similar items in EconPapers)
JEL-codes: H00 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2024-06-04
New Economics Papers: this item is included in nep-his and nep-opm
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Published in Economic History Review, 4, June, 2024. ISSN: 1468-0289

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:122632

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