Twin deficits hypothesis

From a twin deficit (of English. Deficits twin ), occasionally also of twin deficits, is spoken, if a state has both a budget deficit and a current account deficit.

A current account deficit usually means that the respective economy more goods (goods and services ) imported than exported (if one leaves the other sub-balances of the current account except eight). In other words, the economy produces less than it consumes. Normally, such a constellation means that the currency loses value. In such a case, the prices of domestic goods fall and can be offered cheaper elsewhere in the world (abroad). Conversely, the imported goods are more expensive in comparison. Consequently, more domestic goods are in demand and net exports of the economy rise. Through this mechanism, the external contribution balances out. However, since a price change ( by the depreciation of the currency ) is reacted faster than the changes in volume of freight flows, initially exacerbated the deficit; long term it would recover but. Graphically, this effect would look like a J, so one speaks also of the J- curve effect.

The budget deficit describes the debt burden of the state GDP. As the state asks increasingly, it ( also see deficit spending ) come onto the market either to a crowding-out or multiplier effect. Due to the increased demand of the state, to raise interest rates. This go private investment back. Higher interest rates mean in an open economy, however, that the country is interesting for investors.

Due to the influx of capital ( for example, direct investment), the deficits have to be financed. However, moving this type of financing on very thin ice, because the economy and the currency act very unstable because they are based more on the confidence of investors. If the trust away or to another country more attractive for investment, it means that the economy can possibly collapse into itself ( financial crisis).

The most prominent example of a twin deficit is the U.S., which initially expand since the early 80s, under Ronald Reagan, the deficits ever.