The role of fiscal policies for external imbalances: Evidence from the European Union

We revisit the relation between budget deficits and current account deficits for 28 European Union countries from 1996 to 2019. We find that an increase in budget deficit of 1 pp of GDP results in a deterioration of the current account deficit of 0.318 pp of GDP, which supports the Twin Deficits Hypothesis. On the other hand, dynamic panel estimates partially corroborate the Ricardian Equivalence Hypothesis in the presence of a fiscal rules index. In addition: i) the relation between the two deficits is asymmetric and the negative impact of the recent Eurozone banking and sovereign debt crisis on the current account balance is observed; ii) with right-wing governments, the impact of the budget balance on the current account balance is mitigated; if the government is on the left, the impact of the budget balance on the current account balance is amplified; iii) after 2010, the budget balance positively affects the current account balance; and iv) the positive impact of the budget balance on the current account balance is higher in the cases of non-Eurozone countries, high budget deficit countries, and low exports countries, whereas it is lower in the cases of Eurozone countries, low budget deficit countries, and high exports countries.     

Do independent fiscal institutions cause better fiscal outcomes in the European Union?

This paper explores the budgetary implications of the independent fiscal institutions (IFIs) in the European Union (EU). We employ a dynamic panel model for the period 2000–2019 and find that these fiscal watchdogs have a positive and significant influence not only on government budget balance for the EU member states, resulting in smaller government budget deficits, but also on countries’ compliance with fiscal rules, results that hold across alternative fiscal balances. IFIs appear to have a beneficial impact on fiscal performance and compliance with numerical targets in countries with poorly designed fiscal responsibility norms but weaker influence when fiscal rules are less binding (well-designed fiscal rules). The findings remain significant regardless the year of accession to the EU (old vs. new members) or euro-area status (euro-area vs. non-euro-area members). However, we document that IFIs play a larger role in countries that established these monitoring bodies before 2013, indicating that experience matters in IFI performance. Also, our findings show that the influence of IFIs remains if we take into account institutional reforms in which their mandates were extended with different powers and tasks, which has a positive and significant effect on fiscal balances. Moreover, we find that, under the circumstance of systemic and banking crises, these institutions are associated with improved fiscal outcomes, reflecting their increased concern about the path of public finances and their role in reducing budgetary forecasting biases. Our results are robust to a variety of specifications and models, including alternative measures of the government budget balance and after controlling for a set of institutional characteristics and for potential endogeneity in the estimations.     

SURPLUSES AND DEFICITS

The US economy has twin deficits: internal (the budget deficit) and external (the current account). In sharp contrast, the UK combines a PSBR surplus with a rising current account deficit. Japan and West Germany both enjoy large current surpluses, though in Japan the public sector deficit is narrowing whereas in Germany it is rising. Remarkably, as Figure 1 shows, the present position on the public sector and overseas balances in each of the three major OECD economies and the UK is quite different. Japan is the mirror image of the US: the budget and overseas balances have been moving in the direction of surplus - private sector savings have been more stable. For the UK and West Germany (though again as images of one another) it is movements in private sector savings which have driven the current account. How has this come about?     

Budget deficits and the current account balance: New evidence from panel data

This study examines two distinguishing predictions of the finite-horizon open-economy macroeconomic models regarding the effect of fiscal policy on the current account balance: (1) Given the path of government expenditures, a fall in public savings has an adverse effect on the current account balance, and (2) a bond-financed increase in government expenditures exerts a larger adverse effect on the current account balance than a tax-financed alternative. These predictions are vastly different from those of the Ricardian theory. According to this view, (1) lower public savings are met by equal increases in desired private savings, and thus the current account balance does not change, and (2) the response of current account balance to a change in government spending is independent of its financing methods. Empirical analysis of 63 countries is consistent with the conventional theory.     

On the relationship between the current account and the fiscal balance: The case of Canada

This paper uses an Autoregressive Distributed Lag model to examine the long run and short run relationship between the current account and the fiscal balance, as well as other determinants, using Canadian quarterly data from 1981 to 2018. The results indicate that there is a long-run cointegrating relationship between the current account and the fiscal balance, investment, and private credit. Moreover, the relationship between the current account and the fiscal balance is positive in the long-run, thus providing support for the Keynesian Hypothesis of the fiscal balance driving the current account. Specifically, a one percentage point rise in the fiscal balance to GDP ratio yields a 0.43 percentage point rise in the current account as a percent of GDP. This positive relationship is present in the short-run as well. Finally, the findings from the error correction model yield a speed of adjustment of 0.225, hence 22.5% of the long-run adjustment in the current account occurs next period.     

Current account and real effective exchange rate misalignments in Central Eastern EU countries: An update using the macroeconomic balance approach

We make an assessment of the current account and price competitiveness of the Central Eastern European countries that joined the EU, using data up to 2016. Foreign capital flows, fiscal balance and relative output growth seem to play a crucial role in explaining the current account balance. The real effective exchange rate gaps behave in accord with the current account misalignments, which clearly display cyclical behaviour. When foreign direct investments are introduced as a determinant, the misalignments are larger in boom periods (positive misalignments), whereas the negative misalignments are smaller in magnitude. Overall, the countries have moved closer to their equilibria since 2010.     

Budget Prospects: The Problem of the Sterling Balances

Does the balance of payments deficit matter? Stephen Lewis, of Fifth Horseman Publications and UBS Phillips & Drew, suggests that the build-up in sterling balances provides an ominous background to the budget.     

Exchange Rate Adjustment in Partially Liberalized Economy

This paper develops a model of exchange rate determination in partially liberalized post-socialist economy that operates under soft budget constraints in nontradable sectors. The model captures the factors that determine the evolution of a country's external balance during the initial phase of economic liberalization. Three types of disturbances are the center of analysis: liberalization of trade and foreign exchange regime, devaluation, and price liberalization. We show that the real exchange rate appreciation may either improve or worsen the trade balance depending on the sources of this appreciation. Thus, we argue that the real exchange rate cannot reflect true country's competitiveness unless all sectors are equally exposed to hard budget constraints. The model implications are further analyzed through the empirical evidence on the relationship between the real exchange rate and trade balance in three selected East European countries.     

Sovereign debt composition and time-varying public finance sustainability

We compute time-varying responses of the sovereign debt ratio to primary budget balances for 13 advanced economies between 1980 and 2012, and assess how fiscal sustainability reacts to different characteristics of government debt. We find that the sustainability time-varying coefficient increases and countries become more fiscally sustainable if they contract a higher share of long-term public debt, if more debt is held by the central bank or if it is easily marketable in capital markets.     

A nonlinear investigation of the twin deficits hypothesis over the business cycle: Evidence from Turkey

In this paper, we analyze the twin deficits hypothesis covering the period from 1994 to 2012 in Turkey. In contrast to previous studies on Turkey, the existence of twin deficits is investigated by regime-dependent impulse response functions and forecast error variance decompositions based on a multivariate two-regime threshold VAR (TVAR) model. Our results suggest that the dynamics between the current account and budget account variables are affected by macroeconomic activity: twin deficits are only the case in the upper regime, when the economy operates above its potential level. When the economy is in the lower regime, budget and trade deficits show divergent movements. The results are consistent with Kim and Roubini (2008), indicating that the divergence of fiscal balance and current account might be explained by the cyclical fluctuations of output.     

预算机会主义、预算治理构造和预算审计——国家审计嵌入公共预算的理论架构

各国的国家审计在公共预算中的作用呈现不同特色.沿着预算机会主义、预算治理构造到预算审计这个逻辑路径,建立一个关于国家审计在公共预算中作用的理论架构,并以美国和中国作为案例来验证这个理论构架,具有重要意义.各个国家针对预算机会主义会有一个由预算文化、预算制衡和预算问责组成的预算治理构造,预算审计属于预算问责,预算审计如何嵌入预算治理构造的决定因素是剩余预算机会主义,剩余机会主义决定预算审计体制、预算审计重点和预算审计模式.     

Current account and credit growth: The role of household credit and financial depth

Understanding the impact of financial variables on the current account balance is one of the priorities of academic literature and policymakers. Evidence from a broad panel of advanced and emerging countries shows that an increase in credit growth is associated with a significant deterioration in the current account balance. When we examine the roles of the components of credit, we find that an increase in household credit causes a significant decline in the current account balance, whereas an increase in business loans has no significant effect. Therefore, our findings indicate that the significant negative impact of credit growth on the current account balance is driven by household credit. Furthermore, we show that total and household credit growth rates have a stronger negative effect on the current account balance for lower levels of financial depth. Our results suggest that targeted policy measures that curb household credit growth might be more effective to reduce external imbalances particularly at the early stages of financial deepening.     

The autonomy – control balance in Flemish arm's length public agencies

Abstract

This article aims at contributing to the study of arm's length agencies by focusing on what are considered to be core concepts of agencification: autonomy and control of public agencies. The balance between autonomy and control is studied for a set of Flemish public agencies, from three angles: (1) To what extent can we observe the practitioner model of disaggregation, managerial freedom and results based control in Flanders?; (2) Which autonomy-control balances do we find empirically? Departing from two extreme cases – control loss and false autonomy – I conclude that there is a lot of variation amongst Flemish public agencies as to their autonomy-control balances; and (3) Based on a third set of empirical conclusions, I try to broaden the normative discussion on the accountability debate that surrounds arm's length agencies, by proposing a broader concept of steering and control. I conclude the article by proposing four directions for future research on this specific topic of agency research.     

Probabilistic forecasting of output growth,inflation and the balance of trade in a GVAR framework

We apply a global vector autoregressive (GVAR) model to the analysis of inflation, output growth and global imbalances among a group of 33 countries (26 regions). We account for structural instability by use of country‐specific intercept shifts, the timings of which are identified taking into account both statistical evidence and our knowledge of historic economic conditions and events. Using this model, we compute both central forecasts and scenario‐based probabilistic forecasts for a range of events of interest, including the sign and trajectory of the balance of trade, the achievement of a short‐term inflation target, and the incidence of recession and slow growth. The forecasting performance of the GVAR model in relation to the ongoing financial crisis is quite remarkable. It correctly identifies a pronounced and widespread economic contraction accompanied by a marked shift in the net trade balance of the Eurozone and Japan. Moreover, this promising out‐of‐sample forecasting performance is substantiated by a raft of statistical tests which indicate that the predictive accuracy of the GVAR model is broadly comparable to that of standard benchmark models over short horizons and superior over longer horizons. Hence we conclude that GVAR models may be a useful forecasting tool for institutions operating at both the national and supra‐national levels. Copyright © 2010 John Wiley & Sons, Ltd.     

The Feldstein–Horioka Puzzle and Twin Deficits in Selected Countries

Hysteresis (unit root) of the current account, fiscal balance, and investment shares is found for the majority of industrial countries as well as selected emerging and transition economies between 1970 and 2001. Twin deficits are defined as a positive long-run relationship between the current account and the fiscal balance. The paper provides evidence for twin deficits in several countries, although we can see differences between the 1980s and the 1990s. Investment in some EU countries is financed to a relatively high degree at the international financial markets implying that the Feldstein–Horioka puzzle is less important in the EU.     

The Exchange Rate and the Trade Balances of Turkish Agriculture,Manufacturing and Mining

This paper investigates and compares the response to the exchange rate changes of trade balances of three Turkish sectors; agriculture, manufacturing and mining. The impact on trade balance of exchange rate changes is examined using the trade balance model employed in Bahmani-Oskooee [1985, Review of Economics and Statistics 67: 500]. Analysis is conducted based on the quarterly data from 1986: I to 1998: III. It is observed that in response to domestic currency depreciation trade balance of each of all three sectors first improves, then deteriorates and then improves again. Despite exhibiting similar pattern of reaction to the exchange rate change in the short run, long-run or overall response of trade balance differs across the sectors; while trade balances of both manufacturing and mining improve in the long run, agricultural trade balance worsens as a result of domestic-currency depreciation.     

浅析平衡计分卡的“平衡”性

全面正确的理解平衡计分卡的“平衡”性是企业实施平衡计分卡成功的保证。平衡计分卡内容构成的四个角度从结构形式到包含内容都存在“平衡”性。本文中从内外部衡量、时间跨度、长短期目标、因果联系、定量衡量与定性衡量以及过程与目标管理等六个方面全方位的阐述了平衡计分卡存在的“平衡”性,有助于企业对“平衡”性的理解和平衡计分卡的正确实施。     

Time-varying cyclicality of fiscal policy: The case of the Euro area

We assess the cyclicality of fiscal policy in the 19 Euro area countries, notably during recessions, for the period 1995–2020. We use a time-varying measure of fiscal cyclicality to describe fiscal policy developments. The results suggest that during recessions discretionary fiscal policy becomes more pro-cyclical, but the overall budget balance becomes more counter-cyclical. Hence, pursuing a Ricardian fiscal regime by more indebted countries leads to higher counter-cyclicality of fiscal policy. Government size reduces counter-cyclicality, as well as trade openness, and financial development has a positive impact on counter-cyclicality.     

Do common currencies facilitate the net flow of capital among countries?

Earlier studies have hypothesized that membership in a common currency arrangement (either a currency union or a currency board) is associated with larger current account imbalances (either deficits or surpluses) for participating countries. This paper examines a panel of 128 countries over the period 1976–2005, and finds that the current account balances of common currency participants are more highly correlated with fundamental factors (such as net foreign assets, incomes, growth rates, fiscal policy, demographics, resource endowments) than the current accounts of non-participants. Furthermore, this greater sensitivity to fundamentals leads to larger current account imbalances. Participation in a common currency is typically associated with a 1.6 percent increase in a country's current account imbalance. Larger current account imbalances under common currency arrangements could be a sign of increased financial integration. Alternatively, they could reflect the difficulties of current account adjustment under fixed exchange rates.