Empirical evidence on the determinants of current account: the role of fiscal adjustment

Abstract

This dissertation provides empirical evidence regarding the effects of fiscal adjustment on the current account balance for 17 OECD countries. The implemented econometric models also control for several, widely used, short-term and medium-term determinants of the current account balance. Both historical approach, based on the examination of contemporaneous policy documents, and cycle adjusted primary balance (CAPB) are used in order to identify fiscal policies motivated by the governments’ intentions to reduce the fiscal deficit and not by other cyclical factors. My findings suggest that it is very important to separate between tax based and spending based policies of fiscal adjustment. In the case of tax based consolidations it seems that the twin deficits hypothesis holds as an improvement in fiscal balance leads to an improvement in the current account. However, spending based consolidations appear to have a negative impact on the current account balance on the medium term.