Twin Deficits Revisited: a role for fiscal institutions?

Mardi | 2019-04-23
Salle des thèses 10h30 – 12h00

Florence HUART – António AFONSO – Joao Tovar JALLES – Piotr STANEK

We revisit the twin deficit relationship for a sample of 193 countries over the period 1980-2016, using a panel fixed effect (within-group) estimator, bias-corrected least-squares dummy variable, system GMM, and common correlated effects pooled estimation procedures. We estimate the impact of fiscal rules on this relationship. In the absence of fiscal rules, the twin deficit hypothesis is confirmed. The size of the estimated coefficient on the budget balance is between 0.68 and 0.79. However, the existence of fiscal rules strongly reduces the effect of budget balances on current account balances (the coefficient is reduced to 0.1). In addition, our analysis also accounts for various types of fiscal rules (budget balance rules, debt rules, expenditure rules, revenue rules, procedural rules).