Abstract

DELGADILLO CHAVARRIA, Carlos Bruno  and  QUINTANA JALDIN, Patricia Carola. What does precede what? Relationship between the fiscal result and the trade balance; empirical evidence of reverse twin deficits during 1995-2021. rlde [online]. 2025, n.43, pp.85-142.  Epub May 31, 2025. ISSN 2074-4706.  https://doi.org/10.35319/lajed.202543554.

This study examines the dynamic relationship between the trade balance and the primary fiscal balance in Bolivia during the period 1995-2021, aiming to determine which ofthese balances precedes the other and the direction of causality. Using quarterly data and a wide range of robust econometric methodologies -including Granger causality tests, error correction models (VEC, ARDL, FMOLS, CCR), and nonlinear models (NARDL)- empirical evidence consistent with the reverse twin deficits hypothesis was found. The results reveal that declines in the trade balance precede and lead to reductions in the primary fiscal balance, as well as increases in primary public spending. This transmission mechanism suggests that the Bolivian government uses public spending as a countercyclical tool to mitigate the adverse effects of trade deficits on aggregate demand. This phenomenon appears to be driven, in essence, by Bolivias heavy reliance on the international prices of the natural resources it exports, which play a crucial role in the dynamics of the trade balance.

Keywords : Trade balance; primary fiscal balance, primary public expenditure; reverse twin deficits hypothesis; external shock; and cointegration.

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