The role of fiscal policies for external imbalances: Evidence from the European Union

Arbeitspapier

We revisit the relation between budget deficits and current account deficits for 28 European Union countries from 1996 to 2019. We find that an increase in budget deficit of 1 pp of GDP results in a deterioration of the current account deficit of 0.318 pp of GDP, which supports the Twin Deficits Hypothesis. On the other hand, dynamic panel estimates partially corroborate the Equivalence Ricardian Hypothesis in the presence of a fiscal rules index. In addition: i) the relation between the two deficits is asymmetric and the negative impact of the recent Eurozone banking and sovereign debt crisis on the current account balance is observed; ii) after 2010, the budget balance positively affects the current account balance; and iii) the positive impact of the budget balance on the current account balance is higher in the cases of non-Eurozone countries, high budget deficit countries, and low exports countries, whereas it is lower in the cases of Eurozone countries, low budget deficit countries, and high exports countries.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: EconPol Working Paper ; No. 57

Classification and Topics

• Classification: Wirtschaft ; Current Account Adjustment; Short-term Capital Movements ; Open Economy Macroeconomics ; National Deficit; Surplus ; Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models
• Subject: budget deficit ; external deficit ; European Union ; fiscal rules ; panel data

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Afonso, António ; Coelho, José Carlos
• Event: Veröffentlichung
• (who): ifo Institute - Leibniz Institute for Economic Research at the University of Munich
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/233802
• Last update: 10.03.2025, 11:44 AM CET