Examining the existence of twin deficits in Bolivia
Abstract
Purpose
We examine the twin deficits and the direction of its movement for the case of Bolivia, a natural resource-dependent country, using the database of (Kehoe et al., 2019) from 1960 to 2019.
Design/methodology/approach
We combine a structural vector autoregression (SVAR) model with a dynamic stochastic general equilibrium (DSGE) model to understand the transmission mechanisms.
Findings
Our results suggest the existence of twin deficits in Bolivia; however, causality in the Mundell-Fleming sense does not hold. While fiscal policy shocks explain current account deficits, current account shocks have a stronger effect over fiscal deficit. In fact, only 23% of the variance of current account forecast errors is explained by fiscal policy shocks; in contrast, 45% of the variance of the fiscal deficit is explained by current account shocks.
Research limitations/implications
The study is for a specific case, which is a limitation; however, other country samples can be included.
Practical implications
Based on the results of the work, policies can be recommended and designed to cushion the effects of external shocks.
Originality/value
According to the literature available for the Bolivian case, our work constitutes a significant contribution and, therefore, is original for this specific case.
Keywords
Acknowledgements
This paper is part of the Monetary and Fiscal History of Latin America Project of the Becker Friedman Institute for Economics at the University of Chicago. We gratefully acknowledge the financial support for this research that was provided by the Macro Finance Research Program and in the form of a generous contribution from Edward R. Allen. We want to thank Gustavo Canavire-Bacarreza for his comments and support, as well as Pablo Cuba, Carlos Gustavo Machicado, and the three anonymous referees for their valuable feedback on earlier versions of this document.
Citation
Saavedra-Caballero, F. and Villca, A. (2024), "Examining the existence of twin deficits in Bolivia", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-01-2023-0043
Publisher
:Emerald Publishing Limited
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