scholarly journals Do The Federal Deficits Matter?

2011 ◽  
Vol 7 (1) ◽  
Author(s):  
Sayeed Payesteh
Keyword(s):  
Current Account ◽  
Single Equation ◽  
Equivalence Theorem ◽  
Simultaneous Equations ◽  
Ricardian Equivalence ◽  
Budget Deficits ◽  
Macroeconomic Variables ◽  
Economic Problems ◽  
Real Effects ◽  
Current Account Deficits

The sharp and sustained increases in the budget and current-account deficits have once again raised a great deal of concern among many economists on the reemergence of the twin deficits of the1980s and their impacts upon macroeconomic variables. In view of majority of economists, these developments will be creating economic problems such as high real rates of interest, low savings, stagnant economic growth, large and persistent current account deficits, and probably a higher inflation. All economists, however, do not share this view. Those associated with the writings of Robert Barro, argue the Ricardian Equivalence Theorem that budget deficits do not matter and they have no real effects on the economy. The empirical evidence on this issue has been rather inconclusive. In contrast to the previous studies that have used single equation, I use a balance of payment model to investigate simultaneously the impacts of budget deficits on a number of macroeconomic variables using a system of simultaneous equations.

scholarly journals Fiscal Policy and Current Account Dynamics in the Case of Pakistan

2010 ◽  
Vol 49 (4II) ◽  
pp. 577-592 ◽  
Author(s):  
Attiya Y. Javid ◽  
Muhammad Javid ◽  
Umiama Arif
Keyword(s):  
Fiscal Policy ◽  
Current Account ◽  
Government Spending ◽  
Ricardian Equivalence ◽  
Fiscal Deficit ◽  
Budget Deficits ◽  
Current Account Deficits ◽  
Fiscal Balance ◽  
Private Savings ◽  
The Current Account

The relationship between fiscal policy and the current account has long attracted interest among academic economists and policymakers after introduction of the standard intertemporal model of the current account by Sachs (1981) and its extension by Obstfeld and Rogoff, (1995) in open economy macroeconomics. There are two major strands of the current account literature Mundell-Fleming [Mundell (1968) and Fleming (1967)] and Ricardian equivalence [Barro (1974, 1989)] to explain such variations in the deficits. According to Mundell-Fleming model budget deficits cause current account deficits through stimulating income growth or exchange rate appreciation [Darrat (1988); Abell (1990); Bachman (1992) and Bahmani-Oskooee (1992)]. On the other hand, there is Ricardian view that the financing of budget deficits, either through reduced taxes or by issuing bond does not alter present value wealth of private households since both temporarily reduced taxes and issuance of bonds represent future tax liabilities [Kaufmann, et al. (2002); Evans (1989); Miller and Russek (1989); Enders and Lee (1990) and Kim (1995)]. The underlying reason is that the effects of fiscal deficits on the current account depend on the nature of the fiscal imbalance. For example, in a simple theoretical model in which Ricardian equivalence holds, a cut in lump sum taxes and the ensuing fiscal deficit would not affect the current account as the private savings increase will offset the fiscal deficit but investment will be unchanged. Conversely, a transitory increase in government spending will increase both the fiscal deficit and the current account deficit, a case of twin deficits. And a permanent increase in government spending will have no effects on the current account while its effects on the fiscal balance will depend on whether the extra spending is financed right away with taxes (in which case the fiscal balance is unchanged) or whether it is financed with debt (future taxes) in which case the fiscal balance worsens. Thus, fiscal deficit may or may not lead to current account deficits depending on the nature and persistence of the fiscal shock. There is also a third scenario relate to Recardian view that portrays the possibility of negative relationship between the deficits where, for example, output shock give rise to endogenous movements and two deficits are divergent.

scholarly journals Timothy Davin S_130218181

2021 ◽  
Author(s):  
Timothy Davin S
Keyword(s):  
Current Account ◽  
Budget Deficit ◽  
Positive Impact ◽  
State Budget ◽  
Economic Problems ◽  
Current Account Deficits ◽  
Current Asset

Indonesia is a country who relies their income on state budget deficit and current asset deficit.This also has a positive impact on people who involved in tourism activities, in addition to earning income for themselves, people who involved in tourism activities also participate in overcoming economic problems by increasing business fields, reducing current account deficits, and other.

The Relationship of the Current Account Balance and the Budget Balance

1993 ◽  
Vol 37 (2) ◽  
pp. 78-84 ◽  
Author(s):  
L.E. Winner
Keyword(s):  
Current Account ◽  
Equivalence Theorem ◽  
The Other ◽  
Current Account Balance ◽  
Traditional Theory ◽  
Ricardian Equivalence ◽  
Budget Balance ◽  
Relationship Of ◽  
The Relationship ◽  
The Current Account

This paper demonstrates that the traditional theory, that the current account balance and the budget balance are positively related, does not uphold when applied to Australian data. On the other hand, Australian data seems to indicate that Ricardian Equivalence Theorem better explains the movements in the economy.

scholarly journals Twin Deficit and the Macroeconomic variables in Kenya

2014 ◽  
Vol 2 (9) ◽  
pp. 64-85
Author(s):  
Kennedy O Osoro ◽  
Seth O Gor ◽  
Mary L Mbithi
Keyword(s):  
Interest Rates ◽  
Current Account ◽  
Budget Deficit ◽  
Current Account Deficit ◽  
Empirical Relationship ◽  
Trade Deficit ◽  
Current Account Balance ◽  
Budget Deficits ◽  
Domestic Investment ◽  
Macroeconomic Variables

The purpose of this paper is to test the twin deficit hypothesis and empirical relationship between current account balance and budget deficit while including other important macroeconomic variables such as growth, interest rates, money supply (M3) in Kenya from 1963-2012. The study was based on co integration analysis and error correction model (ECM). The results reveal a long-run association between the trade deficit and the fiscal deficit. The findings indicate that the Keynesian view fits well for Kenya since the causality runs from budget deficit to current account deficit. We detected unidirectional causation between the twin deficits, running from budget deficit to current account directly and indirectly through budget deficits which raise real interest rates, crowd out domestic investment, and cause the currency to appreciate in relation to the other currencies and further deteriorates the current account deficit.

scholarly journals Correlation of Macroeconomic Variables with Twin Deficit in Pakistan

2020 ◽  
Vol 16 (1) ◽  
pp. 1-16
Author(s):  
Nazia Abdul Rehman ◽  
Keyword(s):  
Money Supply ◽  
Current Account ◽  
Current Account Deficit ◽  
Positive Association ◽  
Budget Deficits ◽  
Integration Model ◽  
Macroeconomic Variables ◽  
The Core ◽  
Long Run ◽  
Short Period

The macroeconomic term Twin deficit is intensive of the study, which refers to a situation when in an economy both current account and the budget deficits are running at the correspondent time period. The core objective of the paper to investigate the relationship among the twin deficit hypothesis and major macroeconomic variables (Gross domestic product, Foreign Direct Investment, money supply, and interest rate). The results of the study founded through the secondary time series quarterly data from 1992-2018 of Pakistan’s economy. In the study to examine the stationary of data, applied Augmented Dickey-Fuller test and then used Vector Error Correction and Johansen co-integration Model to examine the short and long-term relationship among observed variables. The core finding of the study was that in short period along with long-run period Pakistan faced twin deficit situation due to positive association of current account deficit and Budget deficit. The outcomes of the study also indicate that GDP and FDI have positively long-run association while money supply and rate of interest have negatively long-run association with twin deficit. These results of the study are very helpful for the decision making and implementation of fiscal, monetary and export policies in Pakistan.

scholarly journals Implications of Intertemporal External Budget Deficits in Euroasian Countries

2015 ◽  
Author(s):  
Sabri Azgün
Keyword(s):  
Current Account ◽  
Balance Of Payments ◽  
Current Account Balance ◽  
Budget Deficits ◽  
Current Account Deficits ◽  
Long Run ◽  
Equilibrium Relationship ◽  
To Come ◽  
Sustainable Economic Growth ◽  
The Current Account

Economies should pay attention to the deficits of the balance of payments in order to achieve a sustainable economic growth and development within the process of globalisation. A country having risks in terms of current account deficits can be evaluated as the current economic policy is having problems at present and will have in days to come in the point of sustainability. The sustainability of the current account deficits are defined by the intertemporal budget constraint. According to the budget constraints, the path of outlays to the external world with revenues obtained from abroad determines intertemporal solvency contidion. If there is no long-run equilibrium relationship between these two variables, intertemporal budget constaint will not be provided. The aim of this study is to determine whether it satisfies the intertemporal solvency condition of Euorasian economies for the period 2005Q1-2014Q4. In this study, by analyzing intertemporal externel budget consratint by unit root and cointegration methods, it is examined that carries potantieal risk in terms of the current account balance of Euroasian economies.

scholarly journals Twin Deficits: Evidence From Portugal, Italy, Spain and Greece

2020 ◽  
Vol 55 (5) ◽  
pp. 332-338
Author(s):  
Konstantinos P. Panousis ◽  
Minoas Koukouritakis
Keyword(s):  
Empirical Analysis ◽  
Current Account ◽  
Public Debt ◽  
Budget Deficits ◽  
Government Budget ◽  
Twin Deficits ◽  
External Imbalances ◽  
Eu Countries ◽  
Current Account Deficits ◽  
The Empirical Analysis

Abstract Since the mid-2000s, internal and external imbalances have increased in many EU countries. This contributed to the debate over whether government budget deficits affect current account deficits, known as twin deficits hypothesis. It implies that public debt is actually a burden for future taxpayers and thus a dangerous way for budget financing. Therefore, the fiscal measures implemented by policymakers may also affect the current account. This article tests the twin deficits hypothesis for Portugal, Italy, Spain and Greece for the period 1999–2017. The empirical analysis presented in the article finds evidence that strongly supports this hypothesis only for Italy and Greece. For Portugal and Spain, however, the evidence is quite weak.

scholarly journals Sustainability of Current Account Deficits in the OECD Countries: Evidence from Panel Data Estimators

2017 ◽  
Vol 17 (4) ◽  
pp. 20170069
Author(s):  
Tarlok Singh
Keyword(s):  
Panel Data ◽  
Current Account ◽  
Oecd Countries ◽  
Single Equation ◽  
Numerical Magnitude ◽  
Market Failures ◽  
Current Account Deficits ◽  
Long Run ◽  
Equilibrium Relationship ◽  
Consistent Support

This study estimates the intertemporal model for the relationship between imports and exports and examines the sustainability of CADs and validity of IBC for a comprehensive set of 24 OECD countries. The balanced panel data model is estimated using several single-equation and system estimators to assess the robustness of results across methodologies and test statistics. The study finds that the numerical magnitude of the slope parameter of imports is close to unity consistently across estimators. The standard panel data estimators provide consistent support for the sustainability of CADs and validity of IBC. The optimal FMOLS and DOLS estimators cross-validate the evidence and reinforce the sustainability of CADs. The residual-based single-equation and the VAR-based system cointegration estimators provide consistent support for the long-run equilibrium relationship between imports and exports. The support for the sustainability of CADs suggests that the current account deficits are only short-run phenomena and are balanced by future surpluses. The macroeconomic stabilisation strategies seem to have been effective in correcting the market failures and maintaining the steady-state equilibrium relationship between the inflow and outflow of resources.

What Explains Current Account Surplus in Korea?

2018 ◽  
Vol 17 (2) ◽  
pp. 70-93
Author(s):  
Chirok Han ◽  
Kwanho Shin
Keyword(s):  
Exchange Rate ◽  
Fiscal Policy ◽  
Current Account ◽  
Current Account Balance ◽  
Budget Deficits ◽  
Current Account Surplus ◽  
Short Run ◽  
The Right ◽  
The Impact ◽  
The Current Account

Since the currency crisis in 1998, Korea has experienced continuous current account surpluses. Recently, the current account surplus increased more rapidly—amounting to 7.7 percent of GDP in 2015. In this paper, we investigate the underlying reasons for the widening of Korea's current account surpluses. We find that the upward trend in Korea's current account surpluses is largely explained by its demographical changes. Other economic variables are only helpful when explaining short run fluctuations in current account balances. Moreover, we show that Korea's current account surplus is expected to disappear by 2042 as it becomes one of the most aged economies in the world. Demographic changes are so powerful that they explain, quite successfully, the current account balance trends of other economies with highly aged populations such as Japan, Germany, Italy, Finland, and Greece. When we add the real exchange rate as an additional explanatory variable, it is statistically significant with the right sign, but the magnitude explained by it is quite limited. For example, to reduce the current account surplus by 1 percentage point, a 12 percent depreciation is needed. If Korea's current exchange rate is undervalued 4 to 12 percent less than the level consistent with fundamentals, it is impossible to reduce Korea's current account surplus to a reasonable level by adjusting the exchange rate alone. Another way to reduce current account surplus is to expand fiscal policies. We find, however, that the impact of fiscal adjustments in reducing current account surplus is even more limited. According to our estimates, reducing the current account surplus by 1 percentage point requires an increase in budget deficits (as a ratio to GDP) of 5 to 6 percentage points. If we allow endogenous movements of exchange rate and fiscal policy, the impact of exchange rate adjustment increases by 1.6 times but that of fiscal policy decreases that it is no longer statistically significant.

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