scholarly journals Contradicting the twin deficits hypothesis: The role of tax revenues composition

2014 ◽  
Vol 61 (6) ◽  
pp. 653-667 ◽  
Author(s):  
Alka Obadic ◽  
Tomislav Globan ◽  
Ozana Nadoveza
Keyword(s):  
Current Account ◽  
Economic Transformation ◽  
Current Account Balance ◽  
Twin Deficits ◽  
Main Hypothesis ◽  
Tax Revenues ◽  
Fiscal Balance ◽  
Tax Systems ◽  
The Current Account

The general theory of twin deficits hypothesis does not consider specific characteristics of domestic tax systems, i.e. whether the revenue side of the budget is dominated by indirect or by direct taxes. The main hypothesis of the paper is that in countries with fiscal systems dominated by indirect taxes, the deterioration of the current account balance would imply higher fiscal revenues due to larger imports and consumption. The hypothesis is based on the characteristics of domestic tax systems of Bulgaria, Croatia, Poland and Romania in which indirect tax revenues account for the majority of total budget tax revenues. Results suggest that the co-movements of the current account and the fiscal balance cannot be explained by the twin deficit theory in countries with indirect tax-oriented systems. These results imply that only the structural economic transformation and export orientation of the economy may reverse the causality direction between two deficits.

scholarly journals The Fiscal Policy of Bulgaria from the Standpoints of the Business Cycle and the Twin Deficits Hypothesis

2020 ◽  
Vol 6 (3) ◽  
pp. 256-269
Author(s):  
I. Todorov ◽  
◽  
K. Durova ◽  
Keyword(s):  
Fiscal Policy ◽  
Business Cycle ◽  
Current Account ◽  
Current Account Balance ◽  
Currency Board ◽  
Twin Deficits ◽  
State Budget ◽  
Fiscal Balance ◽  
The Business Cycle ◽  
The Current Account

Macroeconomic management of a small open economy in a currency board arrangement faces two serious problems: first, under a fixed exchange rate, fiscal policy is the only effective macroeconomic instrument for smoothing out the business cycle; second, the twin deficits phenomenon, if it exists, may jeopardize the stability of the currency board arrangement. This paper uses quarterly seasonally adjusted Eurostat data for the period of 1999–2019, the Hodrick–Prescott filter and a vector autoregression (VAR) to answer the three questions that are of utmost importance to Bulgarian policy-makers: first, is the discretionary fiscal policy of the Bulgarian government procyclical or countercyclical? Second, do the automatic stabilizers in the Bulgarian state budget function properly? Finally, is the twin deficits hypothesis valid for Bulgaria? Our findings imply that the fiscal discretion of the Bulgarian government is procyclical, while the automatic fiscal stabilizers do not work effectively. The first part of the twin deficits hypothesis (the causal link between the fiscal balance and the current account balance) is confirmed but the second part of the twin deficits hypothesis (the positive relationship between the fiscal balance and the current account balance) is rejected for Bulgaria. It may be inferred that both sides of the Bulgarian state budget (revenue and expenditure) need to be improved in order to increase the effectiveness of Bulgaria’s fiscal policy. Low budget deficits (not higher than 3% of GDP) are recommended for improving the current account balance and encouraging economic growth.

scholarly journals The Influence of Taxes on Inflows and Outflows of Foreign Direct Investment

2020 ◽  
Vol 6 (3) ◽  
pp. 244-255
Author(s):  
I. M. Drapkin ◽  
Keyword(s):  
Fiscal Policy ◽  
Current Account ◽  
Open Economy ◽  
Small Open Economy ◽  
Current Account Balance ◽  
Currency Board ◽  
Twin Deficits ◽  
State Budget ◽  
Fiscal Balance ◽  
The Current Account

Macroeconomic management of a small open economy in a currency board arrangement faces two serious problems: first, under a fixed exchange rate, fiscal policy is the only effective macroeconomic instrument for smoothing out the business cycle; second, the twin deficits phenomenon, if it exists, may jeopardize the stability of the currency board arrangement. This paper uses quarterly seasonally adjusted Eurostat data for the period of 1999–2019, the Hodrick–Prescott filter and a vector autoregression (VAR) to answer the three questions that are of utmost importance to Bulgarian policy-makers: first, is the discretionary fiscal policy of the Bulgarian government procyclical or countercyclical? Second, do the automatic stabilizers in the Bulgarian state budget function properly? Finally, is the twin deficits hypothesis valid for Bulgaria? Our findings imply that the fiscal discretion of the Bulgarian government is procyclical, while the automatic fiscal stabilizers do not work effectively. The first part of the twin deficits hypothesis (the causal link between the fiscal balance and the current account balance) is confirmed but the second part of the twin deficits hypothesis (the positive relationship between the fiscal balance and the current account balance) is rejected for Bulgaria. It may be inferred that both sides of the Bulgarian state budget (revenue and expenditure) need to be improved in order to increase the effectiveness of Bulgaria’s fiscal policy. Low budget deficits (not higher than 3% of GDP) are recommended for improving the current account balance and encouraging economic growth.

scholarly journals Występowanie deficytów bliźniaczych w wybranych państwach Unii Europejskiej i w Polsce w latach 2009–2018

2021 ◽  
pp. 157-178
Author(s):  
Izabela , Piotr Cirin Zawiślińska ◽  
Piotr Cirin
Keyword(s):  
Current Account ◽  
Debt Crisis ◽  
Balance Of Payments ◽  
Current Account Balance ◽  
Budget Deficits ◽  
Twin Deficits ◽  
State Budget ◽  
Main Research ◽  
Internal Balance ◽  
The Current Account

The aim of the article is to determine the degree, direction and strength of impact of the studied variables, i.e. the state budget balance and the current account balance as part of Poland's balance of payments in the years 2009-2018 against the background of selected European Union (EU) countries. The main research questions focus on determining the type of relationships connecting the studied deficits in the light of previous studies dedicated to the twin deficits hypothesis. The methodology used is based on integrated correlation analysis, linear regression and an analysis of the coefficient of variation. As a result of the study, a strong correlation was found between the cumulative values of the studied deficits, which confirms the existence of the twin deficits hypothesis in Poland in the examined period and means that the budget deficit affects the current account balance. A change in the cumulative balance of the budget by 1% leads to a change in the cumulative balance of the current account of the balance of payments by 0.89%. It can be presumed that the problem of budget deficits and the related debt crisis as well as balance of payments balances under the dichotomy of "surplus north" and "deficit south" in the next decade will be one of the most conflicting and disintegrative for the EU. Thus, the search for a path to budget (internal) balance and balance of payments (external) is one of the key challenges for maintaining cohesion and maintaining sustainable development both in Poland and the entire EU.

scholarly journals The Role of Sovereign Wealth Funds in Promoting the External Stability of the Home Economy

2018 ◽  
Vol 5 (9) ◽  
pp. 96
Author(s):  
Osama El-Baz
Keyword(s):  
Current Account ◽  
Global Economy ◽  
Government Expenditure ◽  
Dynamic Panel Data ◽  
Current Account Balance ◽  
Sovereign Wealth Funds ◽  
Data Set ◽  
External Stability ◽  
The Current Account

<p>Sovereign Wealth Funds (SWFs) are currently playing an important role in the global economy. We investigated the role of SWFs in promoting the external stability of the home economy using a data set spanning 106 countries over the period (1997-2015), whereby Arellano- Bond dynamic panel data models were employed to assess the treatment effect of SWFs on both the level of the current account balance and its volatility. Empirical results revealed that SWFs can play an important role in smoothing the management of the current account balance in the long run. Nonetheless, commodity-based SWFs are expected to outperform non-commodity based SWFs in this respect. Our policy recommendation is that emerging economies should consider the establishment of SWFs to enhance the external stability of their home economies, allocating privatization proceeds to these investment vehicles to protect the rights of future generations in benefiting from them rather than directing such proceeds to finance current government expenditure and budget deficit. Finally, attention should be paid to the implementation of the generally accepted principles and practices when establishing SWFs to ensure their ability to function properly.  </p>

The Impact of Income Distribution on the Current Account

2016 ◽  
Vol 7 (2) ◽  
Author(s):  
Jorge Eduardo Carrera ◽  
Esteban Rodriguez ◽  
Mariano Sardi
Keyword(s):  
Current Account ◽  
Developing Economies ◽  
Control Variables ◽  
Wage Share ◽  
Fiscal Balance ◽  
Functional Distribution ◽  
The Impact ◽  
The Relationship ◽  
The Current Account

AbstractThis paper analyzes the relationship between inequality and the current account, addressing the role of the functional distribution of income. Using panel data for 60 countries over the period 1975–2011, our results confirm that an increase in the wage share is associated with a decrease in the current account. We also analyze the effects of wage share on saving and investment, maintaining the same control variables. We find that the wage share is negatively correlated with saving and does not have a significant effect on investment. This result is consistent with the theories that connect higher wages with greater consumption and less saving. The relationship is stronger for developing economies, highlighting the structural differences between different groups of countries. Specifically, the relevance and sign of control variables like financial intermediation, fiscal balance, demographic ratios, capital account openness and growth expectations show important differences according to the level of development.

scholarly journals EXAMINING THE TWIN DEFICIT HYPOTHESIS: EVIDENCE FROM SELECTED SADC COUNTRIES (1980-2011)

2019 ◽  
Vol 2 (1) ◽  
pp. 1-16
Author(s):  
REGINALD CHAONEKA
Keyword(s):  
Granger Causality ◽  
Current Account ◽  
Causal Relation ◽  
Granger Causality Test ◽  
Series Data ◽  
Current Account Balance ◽  
Fiscal Consolidation ◽  
Causality Test ◽  
Fiscal Balance ◽  
The Current Account

This paper investigates the existence of a causal relationship between fiscal balance and current account balance over the period 1980-2011, for nine SADC countries individually. The analysis is conducted within the framework of Granger causality test and Vector Auto Regression (VAR) approach on time series data for each individual country estimates. The Granger causality test results confirm the twin-deficit relationship, with a causal relation from fiscal deficits to external deficits for two countries: Malawi and Zambia together with SADC group average; inverse link operating from external balance to fiscal balance for another two countries: Zimbabwe and Swaziland. Existence of bi-directional causality was confirmed for Botswana and Ricardian Equivalence Hypothesis was confirmed for Mozambique. Results for Angola, South Africa and Seychelles were ambiguous hence inconclusive. The results point to the existence of a direct causal link from fiscal deficit to external deficit. There are indications that fiscal tightening (budget cuts) tends to correct the current account deficit directly. There is need for government to develop new exports, primary products beneficiation (value addition), use of nanotechnology and nurturing new export industries as a long-term measure.In Zimbabwe and to some extent Swaziland the current account can be used to address the budget balance. Countries such as Malawi and Zambia, which have shown evidence of the twin deficit, imply that policymakers must consider fiscal consolidation. Fiscal consolidation has proved to be effective;however half-hearted fiscal adjustments are doomed to fail. The relationship between the twomacroeconomic variables changes over time depending on the dynamics of the economy. Again, given the intricacies that are innate in mixed economies, it may not be possible to authenticate a tight and steady connection between the two deficits. Government Organizations.

IMF Stabilization Programs, Policy Conduct and Macroeconomic Outcomes: A Case Study of Pakistan

2006 ◽  
Vol 11 (1) ◽  
pp. 35-62
Author(s):  
Nawaz A. Hakro ◽  
Wadho Waqar Ahmed
Keyword(s):  
Current Account ◽  
Inflation Rate ◽  
Current Account Balance ◽  
Macroeconomic Policies ◽  
Explanatory Variables ◽  
Fiscal Balance ◽  
Macroeconomic Impacts ◽  
The Individual ◽  
The Imf

This study is designed to assess the macroeconomic performance of fund-supported programs, and the sequencing and ordering of macroeconomic policies in the context of the Pakistan economy. The generalized evaluation estimator technique has been used to assess the macroeconomic impacts of the IMF supported programs. GDP growth, inflation rate, current account balance, fiscal balance and unemployment are used as the target variables in order to gauge economic performance during the program years. The vector of policy variables (that might have been adopted in the absence of programs) and the vector of foreign exogenous variables are also taken as explanatory variables in the model, so that the individual effect of the IMF supported programs could be assessed. The result suggests that as the IMF prescriptions were applied, the current account balance has worsened, the unemployment rate has significantly increased, and the inflation rate has increased during the years of fund-supported programs. Only the budget balance has shown signs of improvement. Furthermore an inadequate sequencing of reforms has contributed to the further worsening of the economic scenario during the program period.

What Explains Current Account Surplus in Korea?

2018 ◽  
Vol 17 (2) ◽  
pp. 70-93
Author(s):  
Chirok Han ◽  
Kwanho Shin
Keyword(s):  
Exchange Rate ◽  
Fiscal Policy ◽  
Current Account ◽  
Current Account Balance ◽  
Budget Deficits ◽  
Current Account Surplus ◽  
Short Run ◽  
The Right ◽  
The Impact ◽  
The Current Account

Since the currency crisis in 1998, Korea has experienced continuous current account surpluses. Recently, the current account surplus increased more rapidly—amounting to 7.7 percent of GDP in 2015. In this paper, we investigate the underlying reasons for the widening of Korea's current account surpluses. We find that the upward trend in Korea's current account surpluses is largely explained by its demographical changes. Other economic variables are only helpful when explaining short run fluctuations in current account balances. Moreover, we show that Korea's current account surplus is expected to disappear by 2042 as it becomes one of the most aged economies in the world. Demographic changes are so powerful that they explain, quite successfully, the current account balance trends of other economies with highly aged populations such as Japan, Germany, Italy, Finland, and Greece. When we add the real exchange rate as an additional explanatory variable, it is statistically significant with the right sign, but the magnitude explained by it is quite limited. For example, to reduce the current account surplus by 1 percentage point, a 12 percent depreciation is needed. If Korea's current exchange rate is undervalued 4 to 12 percent less than the level consistent with fundamentals, it is impossible to reduce Korea's current account surplus to a reasonable level by adjusting the exchange rate alone. Another way to reduce current account surplus is to expand fiscal policies. We find, however, that the impact of fiscal adjustments in reducing current account surplus is even more limited. According to our estimates, reducing the current account surplus by 1 percentage point requires an increase in budget deficits (as a ratio to GDP) of 5 to 6 percentage points. If we allow endogenous movements of exchange rate and fiscal policy, the impact of exchange rate adjustment increases by 1.6 times but that of fiscal policy decreases that it is no longer statistically significant.

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