Quotation Badinger, Harald, Fichet de Clairfontaine, Aurélien, Reuter, Wolf Heinrich. 2017. Fiscal rules and twin deficits: the link between fiscal and external balances. World Economy 40 (1), 21-35.


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Abstract

This paper investigates the relationship between countries' fiscal balances and current accounts with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account via aggregate (import) demand is potentially amplified by indirect effects, materialising through interest rate effects and intergenerational transfers that reduce savings. On the other hand, the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through Ricardian equivalence considerations. We expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985–2012. As with previous studies, we find a positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis. However, the effect of fiscal balances on the current account depends on the stringency of fiscal (budget balance or debt) rules in place; it is reduced by one-third on average and virtually eliminated for countries with the most stringent fiscal rules.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal World Economy
Citation Index SSCI
WU-Journal-Rating new FIN-A, VW-C
Language English
Title Fiscal rules and twin deficits: the link between fiscal and external balances.
Volume 40
Number 1
Year 2017
Page from 21
Page to 35
Reviewed? Y
URL http://onlinelibrary.wiley.com/doi/10.1111/twec.12427
DOI http://dx.doi.org/10.1111/twec.12427

Associations

People
Badinger, Harald (Details)
Fichet de Clairfontaine, Aurélien (Former researcher)
Reuter, Wolf Heinrich (Former researcher)
Organization
Institute for International Economics IN (Details)
Research Institute for European Affairs FI (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
5115 European integration (Details)
5323 Econometrics (Details)
5335 Political economic theory (Details)
5344 Foreign trade (Details)
5371 Macroeconomics (Details)
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