Twin Deficits in Bolivia: The Consequences of Macro-Fiscal Policies 

Authors: Fabiola Saavedra‑Caballero & Alfredo Villca

Journal: International Journal of Emerging Markets 

Abstract:

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. 

We combine a structural vector autoregression (SVAR) model with a dynamic stochastic general equilibrium (DSGE) model to understand the transmission mechanisms.

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. 

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