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The twin deficits hypothesis: Revisiting an EMU country

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  • Kalou, Sofia
  • Paleologou, Suzanna-Maria

Abstract

We re-examine the issue of the twin deficits hypothesis since recent theoretical and empirical analysis suggests that this hypothesis is subject to structural shifts, the identification of which is very important for policymakers in order to take the correct decisions to overcome situations of economic turmoil. We utilise a different empirical approach and we extend the data sets. We use a multivariate Vector Error Correction framework including the endogenous determination of structural breaks, to determine the causal relation between the budget deficit and the current account deficit for Greece. The two deficits are found to be positively linked through the Current Account Targeting Hypothesis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 34 (2012)
Issue (Month): 2 ()
Pages: 230-241

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Handle: RePEc:eee:jpolmo:v:34:y:2012:i:2:p:230-241

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Web page: http://www.elsevier.com/locate/inca/505735

Related research

Keywords: Twin deficits; Structural breaks; Cointegration; Granger causality; Vector Error Correction model;

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

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