Advanced Search
MyIDEAS: Login

The dynamic linkages of fiscal and current account deficits: New evidence from five highly indebted European countries accounting for regime shifts and asymmetries

Contents:

Author Info

  • Trachanas, Emmanouil
  • Katrakilidis, Constantinos

Abstract

This article provides new empirical evidence on the long-term relationship between the fiscal and current account imbalances, of five European economies under financial market pressure and insolvency; Portugal, Ireland, Italy, Greece and Spain. We attempt to re-evaluate the dynamic linkages between the twin-deficits allowing for the presence of structural breaks and asymmetries. The evidence is in favor of the “twin deficits hypothesis”. More insight is further provided through the magnitude and significance of the asymmetric linkages between the twin deficits in the long-run time horizon. Our findings indicate that fiscal deficit decreases have a greater impact on the current account deficit rather than the opposite.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0264999312004543
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 31 (2013)
Issue (Month): C ()
Pages: 502-510

as in new window
Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:502-510

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Fiscal deficit; Current account deficit; Twin deficits; Structural breaks; Asymmetric cointegration;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lori Leachman & Bill Francis, 2002. "Twin Deficits: Apparition or Reality?," Applied Economics, Taylor & Francis Journals, vol. 34(9), pages 1121-1132.
  2. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
  3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  4. Brissimis, Sophocles N. & Hondroyiannis, George & Papazoglou, Christos & Tsaveas, Nicholas T. & Vasardani, Melina A., 2010. "Current account determinants and external sustainability in periods of structural change," Working Paper Series 1243, European Central Bank.
  5. Junsoo Lee & Mark C. Strazicich, 2004. "Minimum LM Unit Root Test with One Structural Break," Working Papers 04-17, Department of Economics, Appalachian State University.
  6. George Vamvoukas, 1999. "The twin deficits phenomenon: evidence from Greece," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1093-1100.
  7. Michel Normandin, 1996. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Macroeconomics 9607001, EconWPA.
  8. Selahattin Dibooglu, 1997. "Accounting for US current account deficits: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 787-793.
  9. Abell, John D., 1990. "Twin deficits during the 1980s: An empirical investigation," Journal of Macroeconomics, Elsevier, vol. 12(1), pages 81-96.
  10. Abdulnasser Hatemi-J & Ghazi Shukur, 2002. "Multivariate-based causality tests of twin deficits in the US," Journal of Applied Statistics, Taylor & Francis Journals, vol. 29(6), pages 817-824.
  11. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense," Economic Policy, CEPR & CES & MSH, vol. 21(48), pages 597-638, October.
  12. Granger, Clive W.J. & YOON, GAWON, 2002. "Hidden Cointegration," University of California at San Diego, Economics Working Paper Series qt9qn5f61j, Department of Economics, UC San Diego.
  13. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," NBER Working Papers 2685, National Bureau of Economic Research, Inc.
  14. 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.
  15. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
  16. B. Douglas Bernheim, 1988. "Budget Deficits and the Balance of Trade," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 1-32 National Bureau of Economic Research, Inc.
  17. Kevin Grier & Haichun Ye, 2009. "Twin Sons Of Different Mothers: The Long And The Short Of The Twin Deficits Debate," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 625-638, October.
  18. António Afonso & Christophe Rault, 2008. "Budgetary and External Imbalances Relationship : a Panel Data Diagnostic," Working Papers Department of Economics 2008/45, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  19. Alberto Bagnai, 2006. "Structural breaks and the twin deficits hypothesis," International Economics and Economic Policy, Springer, vol. 3(2), pages 137-155, November.
  20. Mohsen Bahmani-Oskooee, 1995. "The Long-Run Determinants of the U.S. Trade Balance Revisited," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 17(3), pages 457-465, April.
  21. Falk, Barry, 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1096-1109, October.
  22. Aart Kraay & Jaume Ventura, 2002. "Current Accounts in the Long and Short Run," NBER Working Papers 9030, National Bureau of Economic Research, Inc.
  23. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  24. Jeffrey A. Rosensweig & Ellis W. Tallman, 1991. "Fiscal policy and trade adjustment: are the deficits really twins?," Working Paper 91-2, Federal Reserve Bank of Atlanta.
  25. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
  26. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, vol. 56(6), pages 1397-1417, November.
  27. John Bluedorn & Daniel Leigh, 2011. "Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account," IMF Economic Review, Palgrave Macmillan, vol. 59(4), pages 582-602, November.
  28. Holmes, Mark J., 2011. "Threshold cointegration and the short-run dynamics of twin deficit behaviour," Research in Economics, Elsevier, vol. 65(3), pages 271-277, September.
  29. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-60, August.
  30. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 719-734.
  31. Ki-Ho Kim, 1995. "On the Long-Run Determinants of the U.S. Trade Balance: A Comment," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 17(3), pages 447-455, April.
  32. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  33. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  34. Mark Holmes & Jesús Otero & Theodore Panagiotidis, 2010. "Are EU budget deficits stationary?," Empirical Economics, Springer, vol. 38(3), pages 767-778, June.
  35. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  36. Mohsen Bahmani-Oskooee, 1992. "What Are the Long-Run Determinants of the U.S. Trade Balance?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 15(1), pages 85-97, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Xie, Zixiong & Chen, Shyh-Wei, 2014. "Untangling the causal relationship between government budget and current account deficits in OECD countries: Evidence from bootstrap panel Granger causality," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 95-104.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:502-510. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.