Fiscal Deficits, Current Account Deficits and Short Term Capital Inflow: The experience of Selected Emerging Market OECD Economies

Abstract

The purpose of this study is to find the causal relationship among fiscal deficit, current account deficit and short term capital inflow and also to determine further the validity of the twin deficit hypothesis. The empirical model is estimated for the selected ten emerging market OECD economies during the period between 2000 and 2016 using annual data. The findings show that there is short term and long term bi-directional causality among the current account deficit, the fiscal deficit and the short term capital inflow except a uni-directional causal relationship from short term capital inflow to current account deficit in the short run. This implies that short term foreign capital inflows is a source of financing means for the current account deficit, its economic consequence may lead to balance of payments problems due to adverse effects on current account and authorities should design a fully fiscal discipline policy that should ensure drastic curtailment of fiscal deficit and at the time create conducive environment to attract foreign remittances and also foreign investment which would help to generate healthy external balances