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Apply the DD-AA-XX model to explain the correlation in the left graph between fiscal balance and current account balance. 6. According to the 2019 IMF
Apply the DD-AA-XX model to explain the correlation in the left graph between fiscal balance and current account balance.
6. According to the 2019 IMF External Sector Report (ESR), the decline and reconfiguration of current account balances over the past decade reflect a combination of macroeconomic policies and terms-of- trade effects. Fiscal policy and credit conditions have been key drivers of current account dynamics since the crisis, such that economies with tight (easy) fiscal policies and credit contractions (expansions) have generally experienced an increase (decline) in their current account balances. The graphs below present some data evidence for the role of fiscal and credit policy driving the current account. 1. Selected Economies: Change in Current Account Balance vs. 2. Systemic Economies: Fiscal Contribution to the Change in the Fiscal Balance and Private Credit, 2007-18' Current Account, 2013-182 (Percent of GDP) (Percent of world GDP) 15- - 100 Fiscal contribution - 0.20 . Change in CA balance -75 - 0.15 10 - -0.10 - 50 -0.05 - 25 5- 0.00 . 0 Change in private credit Change in fiscal balance --0.05 - -25 - -0.10 - -50 -5- . (CA balance, --0.15 fiscal balance) . (CA balance, - -75 --0.20 private credit) -10- 1-100 1-0.25 -15 -10 -5 0 5 10 15 20 CHN USA GBR EA JPN Change in CA balance Sources: Bank for International Settlements; IMF, World Economic Outlook, World Bank, Global Financial Development Database; and IMF staff calculations. Note: Data labels use International Organization for Standardization (ISO) country codes. CA = current account; EA = euro areaStep by Step Solution
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