The Relationship and Trend of Current Account and Budget Deficit: a Case Study of China

Abstract

This article introduces the concept and development of the twin deficit hypothesis. There are three explanations to the twin deficit hypothesis, which are the traditional Keynesian Model, the Mundell-Fleming Model, and the Ricardian Equivalence Theorem. Studies on budget deficits and current account deficits have not yet reached a unified conclusion, but they all provide new ideas and reference significance for the research of this hypothesis. In the context of global current account imbalances, using China as an example, we collected data of China's current account from 2007 to the present. We analyzed the development trend of China's budget deficit and current account deficit over some time. From an internal perspective, analyze the root causes of China's current account deficit decline. Preliminary research results show that the change in the surplus of commodity accounts, savings-investment gap reduction, and significant changes in the real effective exchange rate are the reasons why China's current account deficit has fallen. At this stage, the Chinese government should be alert to the potential risks behind the evolution of the current account, continue to deepen economic structural reform, prevent and resolve domestic financial risks, and minimize the adverse impact of the current account reversal on the Chinese Economy.