Fidrmuc, Jarko --- "Twin deficits – implications of current account and fiscal imbalances for the accession countries" [2003] ELECD 111; in Tumpel-Gugerell, Gertrude; Mooslechner, Peter (eds), "Structural Challenges for Europe" (Edward Elgar Publishing, 2003)

Book Title: Structural Challenges for Europe

Editor(s): Tumpel-Gugerell, Gertrude; Mooslechner, Peter

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843764748

Section: Chapter 11

Section Title: Twin deficits – implications of current account and fiscal imbalances for the accession countries

Author(s): Fidrmuc, Jarko

Number of pages: 20

Extract:

11. Twin deficits ­ implications of
current account and fiscal
imbalances for the accession
countries
Jarko Fidrmuc

1. INTRODUCTION1

Growing fiscal and current account imbalances in a relatively large number
of countries have motivated increasing research on so-called twin deficits.
Taylor (2002) discusses the development of current account deficits over a
period of about 120 years. He shows that external imbalances have been an
important feature of the world economy, although their role has changed
several times. Similarly, Kao and McCoskey (1999) look for panel co-
integration in the OECD countries.
Several authors address twin deficits from the point of view of macro-
economic stability (see Edwards, 2001). In this vein, Halpern (1998) and
Megarbane (2002) underline the negative implications of a combination of
adverse factors (for instance the twin deficits, high interest rates and
exchange rate depreciation), which may increase the vulnerability of tran-
sition countries. Megarbane (2002) also points out a possible interrelation-
ship between the mentioned variables: an adverse fiscal development has to
be counteracted by a more prudent monetary policy, implying higher inter-
est rates. He concludes that fiscal instruments are crucial for sound macro-
economic policy in transition countries. Therefore, twin deficits should be
avoided. Finally, Milesi-Ferretti and Razin (1998a and 1998b) discuss the
relation between current account deficits and currency crises in emerging
markets. They also stress the importance of further research regarding the
role of macroeconomic policies during periods of high current account
deficits and their reversals.
In line with Kao and ...