The nexus between fiscal and current account imbalances in OECD economies

We re-examine the nexus between fiscal balances and current account balances for 18 OECD countries from 1995Q1 to 2018Q1 using panel cointegration and panel vector autoregressive (VAR). The findings confirm a long-run relationship between the fiscal balance and the current account balance. Our results indicate that strengthening the fiscal balance by one percentage point of GDP improves the current account balance by about 0.1–0.3 percentage points of GDP. On the other hand, an increase in real government consumption generally worsens the current account balance. The impact of the real effective exchange rate is not statistically significant.