An Analysis of the Effects of Monetary and Fiscal Policies on the Current Account Deficit in Selected Oil Exporting Countries: A P-VAR Approach

Abstract

One of the important economic variables related to the foreign balance of countries is the current account balance of payments. Current account balance and budget balance are considered as important indicators of macroeconomic stability and welfare. The growing disequilibrium of the current account balance and the government budget balance lead to a macroeconomic imbalance. This paper analyzes the effects of monetary and fiscal policies on current account deficits in selected oil-exporting countries (Algeria, Colombia, Ecuador, Gabon, Iran, Mexico, Nigeria, Saudi Arabia, Kuwait, Angola, Congo, Indonesia, Malaysia, Trinidad, and Tobago) for the period 2000-2015 using a Panel Vector Autoregressive (P-VAR) model. The results indicate that monetary policy (by raising interest rates) will decrease the current account deficit. Considering that, in this research budget deficit coefficient is positive, as budget deficit increases (fiscal policy), the current account deficit decreases. In other words, the twin divergence hypothesis is approved for this group of countries, during the period under review. With increasing oil revenues, current account deficits will increase.

Keywords

• monetary policy
• fiscal policy
• current account
• p-var model
• oil exporting countries.