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| Matthias Hartmann and Helmut Herwartz |
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| ''Consolidation first - About twin deficits and the causal relation between fiscal budget and current account imbalances'' |
| ( 2012, Vol. 32 No.4 ) |
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| 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. |
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| Keywords: Fiscal policy, trade imbalances, Granger causality, forecasting |
JEL: H6 - National Budget, Deficit, and Debt: General
F3 - International Finance: General |
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| Manuscript Received : Nov 22 2012 | | Manuscript Accepted : Dec 03 2012 |
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