Fiscal Policy and the Current Account

Abstract

This paper examines the relationship between fiscal policy and the current account, drawing on a large sample of advanced, emerging and low-income economies and using a variety of statistical methods: panel regressions, an analysis of large fiscal policy and current account changes, and panel vector auto-regressions. On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.3-0.4 percentage point of GDP. This association appears stronger in emerging and low-income economies, or when the exchange rate is flexible; the economies are more open; output is above potential; initial debt levels are above 90 percent of GDP; and using methods robust to endogeneity issues. JEL Classification Numbers: E60, E61, E62, E65, C40, C01

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