FISCAL-POLICY AND CURRENT ACCOUNT PERFORMANCE - INTERNATIONAL EVIDENCE ON THE TWIN DEFICITS

Divergent predictions about the twin deficits relationship, which links the stance of fiscal policy to the current account balance, continue to emanate from variously specified theoretical models of the open economy. This paper utilizes the vector autoregressive (VAR) technique to examine the international evidence from eight countries on quarterly data over the recent period of floating exchange rates from 1972:i-1987:iv. The evidence is consistent with a temporary twin deficits relationship that is not invariant to the government's financing decision and does not persist over time. © 1990.