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Fiscal Consolidation, Fiscal Policy Transmission, and Current Account Dynamics in South Africa

Christine S. Makanza and J. Paul Dunne
Publication date
December 2015
The debate on global current account imbalances continues to develop, with growing interest in the macroeconomic instability and widening current account de…cits faced by emerging markets. Literature establishes that the current account behaves di¤erently depending on macroeconomic circumstances in countries, so approaches to managing external imbalances should be country tailored. Despite this realisation, there is a lack of investigation into drivers of the current account and the impact of macroeconomic policy on current account dynamics in emerging markets. To address this, the study estimates an SVAR model to analyse the e¤ect of …scal shocks on the current account. This helps to understand how …scal shocks shape current account developments, and establishes the usefulness of …scal consolidation in managing current account de…cits by determining whether the twin de…cits approach to managing the external balance holds in middle income countries. The study goes further to analyse the channels through which …scal shocks are transmitted to the current account to understand how current account management policies should be formulated. The study contributes to the literature by providing a case study of South Africa, an emerging economy characterised by large current account de…cits, macroeconomic volatility, a well developed …nancial sector, and a dataset which has not been exploited to understand the external balance. A particularly interesting …nding is that expansionary …scal shocks improve the current account through household savings and public investment , which is a departure from the twin de…cits hypothesis.
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Series title
Working paper 565
JEL classifications