Analyses of Fiscal and Current Account Balances: Do Deficits Matter in Lower and Middle-Income Countries?

Abstract

This research investigates the nexus between current and fiscal account deficits in selected lower and middle-income countries (LMC) by applying panel data from 2000 to 2020. Autoregressive Distributed Lag (ARDL) is applied to check the long-run (LR) and short-run (SR) affiliation between selected variables. The findings revealed that REER, GDPPCG, and trade affect CAB positively, while FD and GFCF influence the CAB negatively in the LR. The SR estimation results show that FD and GFCF are significant in positively affecting CAB. Moreover, this paper proved that the Theory of Ricardian-Equivalence-Hypothesis (REH) is more appropriate for LMC. From the policy perspective, the authorities should follow policy measures such as raising taxes, declining government expenditures, and promoting economic growth to decline the current account deficit. Similarly, the Government of LMC should also improve the investment rate by controlling the high birth rate, inflation rate, and poverty.