Abstract
PurposeWe examine the twin deficits and the direction of its movement for the case of Bolivia, a natural resource-dependent country, using the database of (Kehoe et al., 2019) from 1960 to 2019.Design/methodology/approachWe combine a structural vector autoregression (SVAR) model with a dynamic stochastic general equilibrium (DSGE) model to understand the transmission mechanisms.FindingsOur results suggest the existence of twin deficits in Bolivia; however, causality in the Mundell-Fleming sense does not hold. While fiscal policy shocks explain current account deficits, current account shocks have a stronger effect over fiscal deficit. In fact, only 23% of the variance of current account forecast errors is explained by fiscal policy shocks; in contrast, 45% of the variance of the fiscal deficit is explained by current account shocks.Research limitations/implicationsThe study is for a specific case, which is a limitation; however, other country samples can be included.Practical implicationsBased on the results of the work, policies can be recommended and designed to cushion the effects of external shocks.Originality/valueAccording to the literature available for the Bolivian case, our work constitutes a significant contribution and, therefore, is original for this specific case.