The relationship between fiscal and current account balances in the Caribbean

Abstract

The global economic recession which affected most of the Caribbean would have been less severe if policymakers were in a position to sustain fiscal stimulus packages for a longer duration. This paper argues that while the crisis aggravated the debt and fiscal situation, the negative fiscal and current account balances reflected long standing issues related to declining competitiveness. To address the challenging fiscal situation, a number of countries are pursuing fiscal consolidation programmes, many of which imply expenditure cuts and revenue increases. Implicit in such programmes is that the current account deficits are due to fiscal deficits and, consequently, in some countries fiscal responsibility laws are being enacted. To address the question as to whether the current account balances cause the fiscal balance or vice versa, Granger causality tests were employed. In addition, the proportion of the variance due to the shock from one variable to another is examined using a vector autoregressive moving average (VARMA) framework. The analysis was carried out for Antigua and Barbuda, Barbados, Belize, Grenada, Guyana, Jamaiaca, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines and Trinidad and Tobago for the period 1980-2010.