This paper studies the impact of fiscal policy and external shocks on the
sustainability of Serbia?s external position. The key determinants of
Serbia's current account balance are identified using model averaging
techniques and are compared with estimates obtained for other small open
economies (Poland, Georgia, Morocco, Ukraine, and Estonia). The paper uses
estimated influences of macrovariables on the current account balance to
generate a rich set of possible outcomes for the external position of the
country. The results suggest the importance of fiscal policy for the
reduction of external imbalances in all countries in our sample. In
particular, credible and sustained fiscal adjustment can reduce current
account deficit and stabilize Serbia?s external position close to its current
level over the medium term. The analysis also warns that lack of success in
fiscal consolidation coupled with external shocks may easily push the
external position onto an unsustainable path.