Under a fixed exchange rate regime, the trade balance results can be used, though imperfectly, to measure the intervention in foreign exchange markets. In a managed floating system, in which the exchange rate is allowed to fluctuate but monetary authorities still intervene in foreign exchange markets in order to smooth out fluctuations in exchange rates, it is still an useful concept. Finally, under freely floating regime, when the monetary authorities let the exchange rate fluctuate, the calculation of the official reserve settlements balance loses interest.
Summarizing: the relationship between the fiscal policy and the current account balance is an open question for open economies analysis. Traditional view leads to the so-called "twin deficits hypothesis", which establishes a direct relationship between the government budget deficit and the current account deficit. However, the inter temporal approach of the current account doubts the existence of such a relationship. In this paper, we study this twin deficits hypothesis using a dynamic general equilibrium model in a monetary union context, in which the role of international investors is considered in financing government deficit. We find that the proportion of government debt purchased by foreign investment is a key factor in explaining the relationship between fiscal policy and the current account. In general, we obtain that the effects of different shocks on the current account dynamics are magnified as the proportion of government debt held by foreign investors increases.