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

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  • 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.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

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

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Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:502-510

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

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

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Cited by:
  1. Veronika Å uliková & Marianna SiniÄáková & Denis Horváth, 2014. "Twin Deficits in Small Open Baltic Economies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 227-239, March.
  2. 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, Elsevier, vol. 31(C), pages 95-104.

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