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Twin Deficits Revisited: a role for fiscal institutions?

Author

Listed:
  • António Afonso
  • Florence Huart
  • João Tovar Jalles
  • Piotr Stanek
Abstract
We revisit the twin deficit relationship for a sample of 193 countries over the period 1980-2016, using a panel fixed effect (within-group) estimator, bias-corrected least-squares dummy variable, system GMM, and common correlated effects pooled estimation procedures. The analysis accounts also for the existence of fiscal rules in place, their features, and their interaction with the budget balance. In the absence of fiscal rules, the twin deficit hypothesis is confirmed. The size of the estimated coefficient on the budget balance is between 0.68 and 0.79. However, the existence of fiscal rules strongly reduces the effect of budget balance on the current account balance (the coefficient is reduced to 0.1). In fact, the twin deficits relationship does not hold with some specific kinds of rules: debt rules, rules with monitoring of compliance, as well as budget balance rules and debt rules in emerging market economies and lowest income countries, and in the post-crisis period.

Suggested Citation

  • António Afonso & Florence Huart & João Tovar Jalles & Piotr Stanek, 2018. "Twin Deficits Revisited: a role for fiscal institutions?," Working Papers REM 2018/31, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp0312018
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    9. António Afonso & José Carlos Coelho, 2023. "Twin deficits through the looking glass: time-varying analysis in the Euro area," Economic Change and Restructuring, Springer, vol. 56(4), pages 2087-2110, August.
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    More about this item

    Keywords

    current account; fiscal balance; fiscal rules; panel data; system GMM;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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