Twin Deficits in Developing Economies

This paper provides new evidence of the existence and magnitude of the “twin deficits” in developing economies

From:
Foreign, Commonwealth & Development Office
Published
27 July 2018
Document Type:
Working Paper
Theme:
Economic Growth
Authors:
Furceri, D, Zdzienicka, A.

Abstract

This paper provides new evidence of the existence and magnitude of the “twin deficits” in developing economies. It finds that 1 % 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 some heterogeneity across countries and over time. There is suggestive evidence that the effect tends to be larger:

  1. during recessions;

  2. in countries that are more open to trade;

  3. that have less flexible exchange rate regimes;

  4. with lower initial public debt-to-GDP ratios.

This work is part of the ‘Macroeconomics in Low-income countries’ programme

Citation

Davide Furceri and Aleksandra Zdzienicka (2020) Twin Deficits in Developing Economies. IMF Working Paper No. 2018/170

Twin Deficits in Developing Economies

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Published 27 July 2018
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