Description
This paper investigates relationship between current account and fiscal balances with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account, materializing through aggregate demand, is potentially amplified by indirect effects, materializing through its effect on interest rates and by inter-generational transfers that reduce saving. The latter effect is mitigated by Ricardian equivalence considerations that may potentially offset the reduction in savings. We expect this mitigation effect to be stronger, the more stringent fiscal rules are in place and test this hypothesis using a panel of 73 countries over the period 1985-2012. Our results underline the importance of adding fiscal institutions into standard models on the determinants of the current account. As previous studies, we find a positive relationship between fiscal policy and the current account, but this effect is significantly reduced when stringent balanced budget or debt rules are in place.| Period | 27 Apr 2015 → 28 Apr 2015 |
|---|---|
| Event title | Asymmetries in Europe 2015 |
| Event type | Unkonwn |
| Degree of Recognition | International |