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FISCAL POLICY AND TRADE ADJUSTMENT: ARE THE DEFICITS REALLY TWINS?
Author(s) -
ROSENSWEIG JEFFREY A.,
TALLMAN ELLIS W.
Publication year - 1993
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1993.tb00892.x
Subject(s) - economics , liberian dollar , balance of trade , government (linguistics) , variable (mathematics) , exchange rate , current account , fiscal policy , monetary economics , macroeconomics , international economics , finance , mathematical analysis , linguistics , philosophy , mathematics
Since the mid 1980s, an extensive emprical literature has examined the relationship between U.S. Fiscal deficits, exchange rates, and trade balances. We investigate two questions that continue to spark debate: do increased government deficits casue doller appreciation, and do fiscal deficits lead to higher trade deficits (the popular ‘twin deficit’ notion)? We examine these issues fusing a five‐variable VAR system, generating posterior probability bounds to assess significance. Our result provide some evidence that growing goverment deficits apperciate the dollar, and support the “twin deficit” notion that government deficits contrinute to trade deficits.