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Matthias Hartmann and Helmut Herwartz
''Consolidation first - About twin deficits and the causal relation between fiscal budget and current account imbalances''
( 2012, Vol. 32 No.4 )
During recent years, large trade- and budget deficits have accumulated especially in advanced economies. This study examines if this coincidence actually reflects a causal relation. Economic theory and previously documented findings on causality between trade and government balances are inconclusive. Summarizing evidence over a cross section of 19 advanced economies, we document that the budget balance influences the current account in a more pronounced way than vice versa. Moreover, the documented causal influence is characterized by a stronger tendency towards a twin deficit (or -surplus) rather than a twin divergence.
Keywords: Fiscal policy, trade imbalances, Granger causality, forecasting
JEL: H6 - National Budget, Deficit, and Debt: General
F3 - International Finance: General
Manuscript Received : Nov 22 2012 Manuscript Accepted : Dec 03 2012

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