fiscal deficit and current account deficit pdf

Fiscal deficit and current account deficit pdf

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Twin deficit hypothesis and reverse causality: a case study of China

Introduction

Twin deficit hypothesis and reverse causality: a case study of China

Twin deficits hypothesis

In the globalization and free trade era, the current account deficit problem is a common phenomenon experienced by most countries, both developing and developed countries. Also with managed floating regime of exchange rate, it becomes very important to analyze the dynamics of current account balance which determine the trade. The deficit condition has lasted for four years in Indonesia, as well the deficit value above the value of the surplus that has been experienced during the period

Twin deficit hypothesis and reverse causality: a case study of China

Items in Shodhganga are protected by copyright, with all rights reserved, unless otherwise indicated. Shodhganga Mirror Site. Show full item record. Gangal , Vijay Kumar. A series of dramatic changes has been observed across the financial sector, primarily due to the imperative impact of globalization. Globalization has brought in a paradigm shift in the international trade performance.

Introduction

The Egyptian economy is marked for its budgetary imbalances. The present paper addresses the important question of whether these noticeable budget deficits have come to bear on the current account component of the Egyptian balance of payments, thus creating imbalances therein as well. We thus examine the familiar so called twin deficit hypothesis. Our findings elucidate the existence of a short and long run relationship linking budgetary deficits to their current account counterparts. Thus a Granger causality test reveals that while budget deficits lead to one lag current account deficits, the latter in turn have arguably been the source of two lags deficits in the government budget, which gives a plausible testimony confirming the reverse hypothesis. Indeed, notwithstanding the strong causal effect whereby budget deficits resulted in four to nine year lagged current account deficits; a remarkably significant counter-effect exists, thus signifying a bi-directional causal relationship between the two types of deficits.

Thank you for visiting nature. You are using a browser version with limited support for CSS. To obtain the best experience, we recommend you use a more up to date browser or turn off compatibility mode in Internet Explorer. In the meantime, to ensure continued support, we are displaying the site without styles and JavaScript. A Correction to this article was published on 01 October This paper analyses the causal relationship between budget deficit and current account deficit for the Chinese economy using time series data over the period of —

Twin deficit hypothesis and reverse causality: a case study of China

It has three component balances: the goods and services balance, the investment income balance, and net unilateral transfers. These are all transactions thought to be closely related to current production, consumption, and income. For the United States, the size of the current account deficit is largely the refection of a similarly sized goods and services deficit i. The U.

Budget deficits and the current account balance: New evidence from panel data

In macroeconomics , the twin deficits hypothesis or the twin deficits phenomenon , [1] is the observation that theoretically, there is a strong causal link between a nation's government budget balance and its current account balance. Standard macroeconomic theory points to how a budget deficit can be a contributing factor to a current account deficit. This link can be seen from considering the national accounting model of the economy:.

Twin deficits hypothesis

The UK has a large and persistent current account deficit. Policy makers argue that the deficit is easily financed, temporary and therefore not a sign of structural weakness. We examine the conditions in which it is appropriate for a country to overspend its current income with the intention of repaying loans out of future income. These include: an increase in international capital mobility, larger net holdings of foreign assets, and expectations of faster productivity growth. All three apply to the UK, so official reasoning is, in part, correct. Even so, for several decades there has been a trend deterioration of UK trade performance, most markedly in manufacturing, and we detect no underlying improvement in the s.

This study examines two distinguishing predictions of the finite-horizon open-economy macroeconomic models regarding the effect of fiscal policy on the current account balance: 1 Given the path of government expenditures, a fall in public savings has an adverse effect on the current account balance, and 2 a bond-financed increase in government expenditures exerts a larger adverse effect on the current account balance than a tax-financed alternative. These predictions are vastly different from those of the Ricardian theory. According to this view, 1 lower public savings are met by equal increases in desired private savings, and thus the current account balance does not change, and 2 the response of current account balance to a change in government spending is independent of its financing methods. Empirical analysis of 63 countries is consistent with the conventional theory. This is a preview of subscription content, access via your institution. Rent this article via DeepDyve. Ahmed, Habib, and Stephen M.

The U.S. Trade Deficit: Causes, Consequences, and Policy Options

3 comments

  • CripГ­n L. 31.03.2021 at 10:29

    While fiscal deficits may have some immediate impact on the current account, the full effect of permanent deficit shocks may take years or even.

    Reply
  • Jitesh S. 31.03.2021 at 14:59

    A trade deficit means that the country is importing more goods and services than it is exporting; a trade surplus means the opposite. The current account balance is.

    Reply
  • Kimberly A. 07.04.2021 at 16:52

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