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Twin Deficits in Developing Economies

  • Davide FurceriEmail author
  • Aleksandra Zdzienicka
Research Article
  • 7 Downloads

Abstract

This paper provides new evidence of the existence and magnitude of the “twin deficits” in developing economies. It finds that 1 % of GDP unanticipated increase in the government budget balance improves, on average, the current account balance by 0.8 percentage point of GDP. This effect is substantially larger than that obtained using standard measures of fiscal impulse, such as the cyclically-adjusted budget balance. The results point to some heterogeneity across countries and over time. There is suggestive evidence that the effect tends to be larger: (i) during recessions; (ii) in countries that are more open to trade; (iii) that have less flexible exchange rate regimes; and (iv) with lower initial public debt-to-GDP ratios.

Keywords

Fiscal policy Current account Twin deficits Developing economies 

JEL Classification Numbers

F42 H5 

Notes

Acknowledgments

We are grateful to the editor George S. Tavlas, two anonymous referees and participants of various IMF seminars for comments and suggestions. This working paper is part of a research project on macroeconomic policy in low-income countries supported by U.K.’s Department for International Development. We are also grateful to Tiffany Wrong for excellent research assistance, and Karina Chavez for excellent editorial assistance. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF, IMF policy, or of DFID.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2020

Authors and Affiliations

  1. 1.International Monetary FundWashingtonUSA
  2. 2.University of PalermoPalermoItaly

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