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Ricardian Equivalence Or Twin Deficits Hypothesis? Evidence From Serbia

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  • Jelena Rašković

Abstract

This study investigates empirically whether higher budget deficits worsen the current account balance in Serbia, which is in line with the twin deficit hypothesis.This prediction is very different from Ricardian equivalence theory, which implies that a decrease in public savings is always anticipated via increased private savings. Hence, budget deficits have no impact on the current account balance. Based on quarterly data for the period between 2005 and 2020 and using a multivariate vector autoregression (VAR) model and a short-run structural VAR model, this paper confirms the twin deficit hypothesis in Serbia. More precisely, a 1 percentage point increase in the budget deficit (as a percentage of GDP) generates a 0.31 percentage point increase in the current account deficit (as a percentage of GDP). Moreover, the result is also confirmed using alternative estimation techniques (GMM and OLS method). According to these results, macroeconomic policymakers in Serbia should resort to policies that encourage fiscal consolidation to rectify or at least mitigate deterioration of the current account balance.

Suggested Citation

  • Jelena Rašković, 2023. "Ricardian Equivalence Or Twin Deficits Hypothesis? Evidence From Serbia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 68(238), pages 87-113, July – Se.
    • Handle: RePEc:beo:journl:v:68:y:2023:i:238:p:87-113
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    References listed on IDEAS

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    1. Alka Obadić & Tomislav Globan & Ozana Nadoveza, 2014. "Contradicting the Twin Deficits Hypothesis: The Role of Tax Revenues Composition," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(6), pages 653-667, December.
    2. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
    3. Salvatore, Dominick, 2006. "Twin deficits in the G-7 countries and global structural imbalances," Journal of Policy Modeling, Elsevier, vol. 28(6), pages 701-712, September.
    4. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.
    5. George Vamvoukas, 1999. "The twin deficits phenomenon: evidence from Greece," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1093-1100.
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    More about this item

    Keywords

    twin deficits hypothesis; Ricardian equivalence; budget balance; current account balance; short-run structural VAR.;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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