Budget Deficits and Current Account in Japan and the U.S.: An Empirical Evidence on the Twin Deficits Hypothesis

Yoichi Matsubayashi ()

No 1010, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: This paper theoretically examines the mechanism of the occurrence of gtwin deficits h, which means that the budget balance influences the current account, and quantitatively analyzes the probability of the occurrence. Specifically, the author studies the cases of Japan and the U.S. to demonstrate that changes in liquidity constraint in households play an important role in the occurrence of twin deficits. The quantitative analysis indicates that Japan is likely to have had the mechanism where the deteriorating budget balance negatively influenced the current account in the 1990 fs, but not as far as turning it into a deficit. On the other hand, in the U.S., the rapid expansion of the budget deficits since 2007 seems to have deteriorated the current account, which implies the occurrence of twin deficits.

Keywords: Current Account; Budget Deficits; Twin deficits; Liquidity Constraint (search for similar items in EconPapers)
JEL-codes: E21 E62 F41 (search for similar items in EconPapers)
Pages: 22pages
Date: 2010-06
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Persistent link: https://EconPapers.repec.org/RePEc:koe:wpaper:1010

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