Fiscal and current account imbalances: The cases of Germany and Portugal

Abstract We investigate the bilateral relationship between government budget balances and current account balances for Germany and Portugal. We find that the response of the current account balance to the budget balance is greater in Portugal than in Germany. On the other hand, the response of the budget balance to the current balance is higher in Germany than in Portugal. In Germany and Portugal, a fiscal rules index has a negative impact on the current account balance and the government effectiveness index has a positive impact on the government balance. The public debt‐to‐GDP ratio positively affects the current account balance in Portugal while the output gap has a negative influence, and that is not the case in Germany. During the period of implementation of the external assistance programme in Portugal, the current account balance improved, while the government balance did not. Finally, Germany's output gap positively influences Portugal's fiscal position.