Twin Deficits in Developing Economies
This paper provides new evidence of the existence and magnitude of the “twin deficits” in developing economies
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:
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during recessions;
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in countries that are more open to trade;
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that have less flexible exchange rate regimes;
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with lower initial public debt-to-GDP ratios.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Davide Furceri and Aleksandra Zdzienicka (2020) Twin Deficits in Developing Economies. IMF Working Paper No. 2018/170