Twin Deficits, Real Interest Rates and International Capital Mobility

Abstract

We argue that the interactions among the current account and budget balances and the real interest rate can provide more information about the effective degree of financial openness of an economy than simple saving-investment correlations. Cointegration tests reveal a variety of linkages between the variables across countries. A number of economies (Canada, Germany, Netherlands, and increasingly the UK) appear to be small and open, while Japan and the USA are effectively closed.The 'twin deficits' and 'current account targeting' hypotheses receive some support in the short run.