Twin Deficits in Developing Economies

By Davide Furceri, Aleksandra Zdzienicka

July 27, 2018

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Format: Chicago

Davide Furceri, and Aleksandra Zdzienicka. Twin Deficits in Developing Economies, (USA: International Monetary Fund, 2018) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper provides new evidence on the existence and magnitude of the “twin deficits” in developing economies. It finds that a one percent 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 heterogeneity across countries and over time. The effect tends to be larger: (i) during recessions; in countries (ii) that are more open to trade; (iii) that have less flexible exchange rate regimes; and (iv) with lower initial public debt-to-GDP ratios.

Subject: Current account, Current account balance, Expenditure, Fiscal consolidation, Fiscal policy

Keywords: Exchange rate, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/170
Stock No:

WPIEA2018170
ISBN:

9781484364000
ISSN:

1018-5941

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