by Ethan Fleegler

Abstract

The twin deficit theory postulates that sustained fiscal deficits will result in current account deficits. This claim has been widely debated in the economic literature with most research focusing on its effects in developed economies. This paper attempts to further this discussion by examining the potential impacts of fiscal deficits on current account deficits for a cross-section of economies at different stages of development. The findings suggest that there may be multiple factors contributing to an economy’s susceptibility to twin deficits. Specifically, a country’s susceptibility is in part influenced by where the country is in the development process, who it trades with, and what it imports and exports.

Professor Lori Leachman, Faculty Advisor

JEL Codes: P

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