Authors: Leonardo Bartolini and Amartya Lahiri

Recent declines in the U.S. current account and fiscal balances have sparked renewed debate over the twin-deficit hypothesis, which argues that a larger fiscal deficit, through its effect on national saving, leads to an expanded current account deficit. This study reviews international evidence on the hypothesis, finding some support for it. However, the link observed between fiscal and current account deficits is too weak to support the view that deficit reductions in the United States can play a major role in correcting the nation's current account imbalance with the rest of the world.