Fiscal balance and current account in professional forecasts

Abstract

This paper investigates the relationship between financial institutions' expectations of the current account and the fiscal balance. Using professional macroeconomic forecasts for the G-7 countries, we find a positive relationship between forecasts of the cyclically adjusted fiscal balance deficit and forecasts of the current account deficit, indicating that professional forecasts embody links implied by the twin deficits hypothesis. In assessing the relationship between the forecasts of the fiscal deficit and the current account, we find that forecasters correctly make the distinction between the effect of fiscal policy and automatic stabilizers.