Abstract
We test the relationship between the current account and fiscal policy for a group of small open developing economies with fixed exchange rates some of which are oil exporters. Specifically, we test the viewpoint of a Ricardian infinite-horizon representative agent model in which lower public savings are met by equal increases in private savings, and as a result the current account does not respond to the changes in government spending, against a Keynesian’s conventional viewpoint in which a fall in public savings has an adverse effect on the current account balance. Unlike the evidence from flexible exchange rate economies provided by many authors such as Rosensweig and Tallman (Econ Inq 31(4):580–594, 1993), Erceg et al. (Int Finance 8(3):363–397, 2005) and Saleh et al. (South Asia Econ J 6(2):221–239, 2005), the evidence from a panel data analysis and Granger-causality test of these fixed exchange-based countries supports the conventional theory of positive relationship between fiscal and external balances, with causality running from the former to the latter, in oil countries, whereas it supports the Ricardian view for non-oil countries.
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Notes
The US budget deficit as a percentage of GDP was 11.9 % in 2009 (Source: OECD Economic Outlook, Vol. 2012(2) No. 92).
Expected real interest rates rise for the home country only if it is large enough to influence world markets, or if the increased national debt induces foreign lenders to demand higher expected returns on this country’s obligations to compensate for the country’s default risk.
This study includes data from 20 industrial and 43 developing countries over the period 1975–1998.
From 1970 to 1977, Sri Lanka had a dual exchange rate system in addition to exchange and import controls. In November 1977, the exchange rate system was liberalized as part of the economic reforms.
The Greek’s drachma was pegged to the US dollar from 1950–1972, but it is float against a basket of currencies in 1975.
This study was applied for the UK data in the period 1701–1918.
This study used data from Canada, West Germany, Japan, UK, and USA in the period 1974–1985.
This study was applied for the US data in the period 1955–1987.
This study was applied for the US data in the period 1922–1938.
The sample includes Australia, Britain, Canada, France, Germany, Ireland, Italy, and the United States.
Total factor productivity was intended to be among the right-hand side variables, as a measure of output shocks to test Kim and Roubini (2008) view, but we could not, because the required data to calculate it were not found for the investigated countries.
The sample consists of the following countries: Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, and United Arab Emirates.
We use gross capital formation as a proxy measure of gross investment in the economy.
The first differenced variables also help correcting for any serial correlation and any over rejection of the unit root null hypothesis.
We use STATA command xtgls to perform that estimation.
If the panel-heteroskedastic assumption is correct, the FGLS estimates are more efficient. Therefore, we will test for heteroskedasticity before running the FGLS estimation.
These figures are available from the author upon request.
In both tests, the null hypothesis will be violated if even one unit in the panel is stationary. Therefore, a rejection should not be taken to indicate that each of the countries in the panel is stationary, but rather an indication that the condition that all countries are \(I(1)\) does not receive empirical support.
See Fig. 1.
Other results for IVFE, IVRE, and OLSFE are available from the author upon request.
The change of current account and general fiscal balances by 0.30 % of GDP are considered to be significant, because the average rate of these balances to GDP is \(-\)2.5 to 7.5 % of GDP.
This argument will be valid only if that infrastructure increases, directly or indirectly, the oil-exporting capacity.
This estimation was performed using STATA command xtpcse which assumes that the disturbances are, by default, heteroskedastic and contemporaneously correlated across panels (which applied for both oil and non-oil countries) while the option that accounts for autocorrelation is applied for the non-oil countries only. The estimated P-VAR, with 4 lags, for the current account balance, taxes, and government expenditure equations for both oil and non-oil countries gives almost the same results as given in Table 4. These results are not reported in the paper but available from the author upon request.
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Appendix
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Eldemerdash, H., Metcalf, H. & Maioli, S. Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective. Empir Econ 47, 825–851 (2014). https://doi.org/10.1007/s00181-013-0771-9
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DOI: https://doi.org/10.1007/s00181-013-0771-9