Working Paper: CEPR ID: DP7859
Authors: S. M. Ali Abbas; Jacques Bouhgahagbe; Antonio Fatas; Paolo Mauro; Ricardo C. Velloso
Abstract: This paper examines the relationship between fiscal policy and the current account, drawing on a larger country sample than in previous studies and using panel regressions, vector auto-regressions, and an analysis of large fiscal and external adjustments. On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.2?0.3 percentage point of GDP. This association is as strong in emerging and low-income countries as it is in advanced economies; and significantly higher when output is above potential.
Keywords: current account; exchange rate; external imbalances; fiscal policy
JEL Codes: C01; C40; E60; E61; E62; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal balance (E62) | Current account (F32) |
| Fiscal balance changes (E62) | Current account adjustments (F32) |
| Output above potential (E23) | Fiscal policy impact on Current account (F32) |
| Output below potential (E23) | Fiscal policy impact on Current account (F32) |
| Government consumption (H59) | Current account deterioration (F32) |
| Openness to trade (F10) | Fiscal policy impact on Current account (F32) |