Current account dynamics and expected future budget deficits: some international evidence

This paper addresses the question of whether current account deficits are l inked to expected future budget deficits. We use an optimizing general equi librium model to show the theoretical relationship between the two deficits . We then estimate the econometric equation based on the forward-looking ex pectations model for OECD countries, thus extending earlier research based on more conventional analysis. From the empirical investigation evidence is obtained that strongly supports the view that current account deficits hav e been associated with expected future budget deficits during the 1970-1997 period. (C) 2000 Elsevier Science Ltd. All rights reserved.