Fiscal policy and the current account new evidence from four East Asian countries

Abstract

The long-run relation and short-run dynamics of fiscal policy and current account is examined using time-series data on four East Asian economies – South Korea, Malaysia, Singapore and Thailand. The purpose of the study is to test the validity of two alternative views on budget deficits – the Ricardian and Keynesian theories. According to Ricardians, given the path government spending, a rise in budget deficits has no effect of national savings, investment and the current account. In contrast, Keynesian theory suggests that such tax cuts reduce national savings and result in current account deficits. Empirical results based on cointegration model and Error Correction Model (ECM) over 1975–2008 are broadly consistent with the Ricardian view.