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dc.contributor.authorCORSETTI, Giancarlo
dc.contributor.authorMÜLLER, Gernot J.
dc.date.accessioned2007-01-29T15:24:03Z
dc.date.available2007-01-29T15:24:03Z
dc.date.issued2006
dc.identifier.citationEconomic Policy, 2006, Vol. 21, No. 48, pp. 597-638en
dc.identifier.issn1468-0327
dc.identifier.issn0266-4658
dc.identifier.urihttps://hdl.handle.net/1814/6677
dc.description.abstractSimple accounting suggests that shocks to the government budget move the current account in the same direction, and this `twin deficits' intuition leads many observers to call for fiscal consolidation in the US as a necessary measure to reduce the large external imbalance of this country. The response of other macroeconomic variables to budget developments, however, has important implications for `twin deficits' and for this policy prescription. Focusing on the international transmission of fiscal policy shocks via terms of trade changes, we show that the likelihood and magnitude of twin deficits increases with the degree of openness of an economy, and decreases with the persistence of fiscal shocks. We take this insight to the data and investigate the transmission of fiscal shocks in a vector autoregression (VAR) model estimated for Australia, Canada, the UK and the US. We find that in less open countries the external impact of shocks to either government spending or budget deficits is limited, while private investment responds in line with our theoretical prediction. These results suggest that a fiscal retrenchment in the US may have a limited impact on its current external deficit.en
dc.format.extent24064 bytes
dc.format.mimetypeapplication/pdf
dc.language.isoenen
dc.relation.ispartofEconomic Policy
dc.rightsinfo:eu-repo/semantics/openAccess
dc.titleTwin deficit : squaring theory, evidence and common senseen
dc.typeArticleen
dc.neeo.contributorCORSETTI|Giancarlo|aut|EUI70002
dc.neeo.contributorMULLER|Gernot J.|aut|
dc.identifier.volume21
dc.identifier.startpage597
dc.identifier.endpage638
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