Current account and fiscal deficits-Evidence of twin divergence from selected developing economies of Asia

Abstract

Questions concerning the relationship between the fiscal policy and the current account are of great analytical and empirical interest. This paper empirically investigates the relationship between current account deficits and fiscal deficits with controlling variables such as inflations, exchange rates, interest rates and trade openness for ten developing economies of Asia in the period of 1985 – 2012. Based on the panel differenced GMM Arellano-Bond estimator and the PMG estimation-based error correction model, the study finds out that (1) the speed of adjustment in the short run to reach equilibrium level in the long run is 40.47%/year; (2) a twin divergence between fiscal deficits and current account deficits in 10 Asian countries.