The Study On The Effect Of China’s Fiscal Deficit On The Current Account

China, as the largest developing country, is experiencing a period of rapid economic growth, with persistent huge current account surplus. In 2006, especially, the amount of China’s current account surplus surpassed Japan and became the largest in the world. This huge long-lasting current account surplus is drawing attention from all over the world.The persistent huge surplus stimulated economic growth by enlarging domestic demands, creating employment opportunities, expanding foreign exchange reserves which allows bigger international solvency, and attracting foreign direct investment. But over the long run, the problems that China’s dramatic current account imbalance will bring us outweigh its benefits.The nature of current account imbalance is awful distribution of resource, which reflects both external economic imbalance and internal economic imbalance. Persistent current account imbalance will not only do harm to external economic environment, but also magnify internal economic imbalance. From the perspective of international economy, China’s long-lasting current account surplus leads to RMB appreciation and other countries’ resistant to China’s foreign trade, which exacerbate our external trade environment. From the perspective of internal economy, China’s persistent current account surplus doesn’t agree with the macro-economic objective, which intends to maintain balance of international payments, or a slight surplus. The narrowing space of monetary policy which the government could use to perform macro-control makes liquidity adjustment more and more difficult. If no effective measure is taken to adjust current account, socio-economic status would be in long-term structural imbalance, leading to potential risk of future economy.The relationship between budget deficits and current account affects the balance of internal and external economy directly. It has become the research focus.Most studies are based on current mainstream macroeconomic framework of intertemporal equilibrium analysis, few empirical studies focus on the relationship between China’s budget deficits and current account. This article aims to uncover the cause of the long-term coexistence of China’s fiscal deficit and current account surplus by analyzing the effect of China’s fiscal deficit on current account in a microcosmic view.This article analyzes the effect of savings and investment on current account in the perspective of the saving-investment conduction mechanism at first. Then we study the impact of fiscal deficit on private sector saving and investment behavior. Each part includes theoretical analysis and empirical analysis.Firstly, this article reviews studies of different theoretical schools on intertemporal equilibrium of current account, relationship between budget deficits and current account, and saving-investment transmission mechanism. The literature review is the theoretical basis for the follow-up study.Secondly, this article analyzes the existence of the impact of fiscal deficits on current account by theoretical models and empirical tests respectively. In theoretical study, based on the framework of current account intertemporal equilibrium analysis, we build a current account intertemporal equilibrium model to interpret the impact of fiscal deficit shocks on current account. In empirical study, based on China’s macroeconomic data, we build a five-variable-model and use cointegration analysis.Thirdly, after the impact of fiscal deficit on current account being justified, we analyze the transmission mechanism between fiscal deficit and current account with theoretical models and empirical tests respectively. In theoretical study, we build a current account saving-investment gap model? and analyze the relationship between the saving-investment gap and current account.In empirical study, we check the applicability of our current account saving-investment gap model using China’s macroeconomic data.At last, this article decomposes the saving-investment gap into saving and investment as two separate parts. We also conduct more detailed studies on the impact of fiscal deficit on private savings and investment in four steps of establishing theoretical models, interpreting economic theories, analyzing empirical data, and testing empirical models. Based on conclusions from our study, we give some policy recommendations about China’s current account adjustment.