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Current account adjustments in OECD countries revisited: The role of the fiscal stance

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  • Theofilakou, Nancy
  • Stournaras, Yannis

Abstract

This paper revisits the adjustment path of key economic and financial indicators during large current account adjustment episodes in OECD countries, after controlling for discretionary fiscal policy behavior. We find that the drivers of current account deficit reversals differ according to the fiscal policy stance. In economies with expansionary fiscal policies, external sector adjustment is driven by cyclical and credit factors. In economies implementing fiscal consolidation, adjustment is triggered by fiscal and financial factors, while the disruptive effects of the adjustment are smaller. We conclude that fiscally challenged economies facing external imbalances could ameliorate the adjustment path through fiscal consolidation policies.

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  • Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 719-734.
    • Handle: RePEc:eee:jpolmo:v:34:y:2012:i:5:p:719-734
    DOI: 10.1016/j.jpolmod.2011.12.001
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    Cited by:

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    More about this item

    Keywords

    Fiscal policy; Current account adjustment; Event study analysis; Multinomial discrete choice modeling;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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