Fiscal Policy and the Current Account: Are Microstates Different?

By Yehenew Endegnanew, Therese Turner-Jones, Charles Amo Yartey

February 1, 2012

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Yehenew Endegnanew, Therese Turner-Jones, and Charles Amo Yartey. Fiscal Policy and the Current Account: Are Microstates Different?, (USA: International Monetary Fund, 2012) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the empirical link between fiscal policy and the current account focusing on microstates defined as countries with a population of less than 2 million between 1970 and 2009. The paper employs panel regression and panel vector autoregression (VAR) on 155 countries of which 42 are microstates. Panel regression results show that a percentage point improvement in the fiscal balance improves the current account balance by 0.4 percentage points of GDP. The real effective exchange rate has no significant impact on the current account in microstates but the coefficient is significant in the global sample. Panel VAR results show that an increase in government consumption results in real exchange appreciation but the effect on the current account after an initial deterioration dies out quicker in microstates than in the global sample. The result implies that fiscal policy has little effect on the current account in microstates beyond its direct impact on imports. Overall, the results suggest that the weak relative price effects make the effect of fiscal adjustment on the current account much more difficult in microstates.

Subject: Balance of payments, Current account, Current account balance, Fiscal policy, Foreign exchange, Government consumption, National accounts, Real effective exchange rates

Keywords: Current account, Current account adjustment, Current account balance, Fiscal policy, GDP ratio, Global, Government consumption, Government consumption, Interest payment, Microstates, Panel VAR methodology, Panel VAR technique, Panel vector autoregresssion, Potential GDP, Real effective exchange rates, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/051
Stock No:

WPIEA2012051
ISBN:

9781463937126
ISSN:

1018-5941

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