We apply a "new" conventional (CAPB-based) measure of fiscal policy, which is less prone to endogeneity issues, and find that a 1-percent of GDP fiscal consolidation leads to the improvement of the current account-to-GDP ratio by approximately 0.8 percent of GDP, while previous research based on conventional measures found a relationship of only 0.1-0.3 percentage points. We suggest that revious results based on conventional measures are biased towards underestimating the twin-deficit linkage because of endogeneity issues and the failure to adjust the CAPB for cyclical effects. After adjustment, the twin-deficit ffect is particularly pronounced in the case of expenditure cuts and in Eurozone countries. These findings are in line with previous evidence based on narrative measures.
fiscal adjustment current account twin deficit Eurozone countries