Empirical Study On The Relationship Between Fiscal Deficit And The Current Account Surplus In China

In the last two decades, some developed countries, represented by the United States, have been in the fiscal deficit and current account deficit, which was named "double deficits" phenomenon. While in the emerging developing countries, represented by China, the current account surplus has been rising. This unusual phenomenon focuses some economists’ attention, and they tried to study it from theoretical study or empirical research.For the relationship between the current account and fiscal deficits, different theories’ advocators have different views. The traditional Keynesians proved that the current account have a close relationship with excess savings and the fiscal deficit, according to the national income identity. The fiscal deficit affects the current account deficit through saving—investment channel. In the International absorption theory, the residents’ consumption, investment and government purchases are collectively referred to as domestic absorption. The increasing of fiscal deficit influences the current account through domestic absorption. Mendell--Fleming model proves that fiscal deficits under different exchange rate system have different influences in the current account. However, the supporters of Ricardian equivalence theorem support that fiscal policy is neutral. In other words, the fiscal deficit has no effect for current account. In this paper, after summarizing four kinds of theory, we provide corresponding transmission mechanisms:savings to investment transmission mechanism, spending to absorption transmission mechanism and the exchange rate transmission mechanism.In addition to the theoretical research, this article clarifies the role of fiscal policy in current account. For the actual fiscal deficit situation in our country, on the one hand, we analyze the changes of fiscal policy and current account. On the other hand, we analyze the relationship between fiscal deficit and current account empirically. The empirical analyses include both static analysis and dynamic analysis. Static analysis focuses on the relationship between the current fiscal deficit and current account current, while dynamic analysis pay attention unit root test, co-integration test, Impulse response function and variance decomposition. Finally, we give some suggestions based on static analysis and dynamic analysis.