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Fiscal Consolidation and the Current Account: OECD Evidence

Christian Breuer () and Chang Woon Nam ()
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Christian Breuer: Chemnitz University of Technology, Department of Economics, Junior Professorship for European Economics and ZBW - Leibniz Information Centre for Economics
Chang Woon Nam: ifo Institute Munich, CESifo and University of Applied Management Ismaning

No 35, Chemnitz Economic Papers from Department of Economics, Chemnitz University of Technology

Abstract: We apply a "new" conventional (CAPB-based) measure of fiscal policy, which is less prone to endogeneity issues, and find that a 1-percent of GDP fiscal consolidation leads to the improvement of the current account-to-GDP ratio by approximately 0.8 percent of GDP, while previous research based on conventional measures found a relationship of only 0.1-0.3 percentage points. We suggest that revious results based on conventional measures are biased towards underestimating the twin-deficit linkage because of endogeneity issues and the failure to adjust the CAPB for cyclical effects. After adjustment, the twin-deficit ffect is particularly pronounced in the case of expenditure cuts and in Eurozone countries. These findings are in line with previous evidence based on narrative measures.

Keywords: fiscal adjustment; current account; twin deficit; Eurozone Countries (search for similar items in EconPapers)
JEL-codes: E62 E63 H50 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2020-01, Revised 2020-01
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Published in Chemnitz Economic Papers, January 2020, pages 1-21

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