DP7859 Fiscal Policy and the Current Account

Author(s): S.M. Ali Abbas, Jacques Bouhga-Hagbe, Antonio Fatás, Paolo Mauro, Ricardo C. Velloso
Publication Date: June 2010
Keyword(s): current account, exchange rate, external imbalances, fiscal policy
JEL(s): C01, C40, E60, E61, E62, E65
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7859

This paper examines the relationship between fiscal policy and the current account, drawing on a larger country sample than in previous studies and using panel regressions, vector auto-regressions, and an analysis of large fiscal and external adjustments. On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.2?0.3 percentage point of GDP. This association is as strong in emerging and low-income countries as it is in advanced economies; and significantly higher when output is above potential.