IMF Economic Review

, Volume 59, Issue 4, pp 582–602 | Cite as

Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account

  • John Bluedorn
  • Daniel Leigh
Article

Abstract

This paper investigates the effect of fiscal consolidation on the current account. We examine contemporaneous policy documents, including Budget Speeches, Budgets, and IMF and OECD reports, to identify changes in fiscal policy motivated primarily by the desire to reduce the budget deficit, and not by a response to the short-term economic outlook or the current account. Estimation results based on this measure of fiscal policy changes suggest that a 1 percent of GDP fiscal consolidation raises the current account balance-to-GDP ratio by about 0.6 percentage point, supporting the twin deficits hypothesis. This effect is substantially larger than that obtained using standard measures of the fiscal policy stance, such as the change in the cyclically adjusted primary balance.

JEL Classifications

E62 F32 N10 

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Copyright information

© International Monetary Fund 2011

Authors and Affiliations

  • John Bluedorn
  • Daniel Leigh

There are no affiliations available

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