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The twin deficit hypothesis: the case of Bulgaria

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  • Gancho Todorov Ganchev

    (South-West University, Blagoevgrad)

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    Abstract

    Recent developments in the Bulgarian economy bring into question the validity of the twin deficit hypothesis. This paper analyses the theoretical foundations of and alternative explanations for this hypothesis and uses different econometric approaches to test its validity on a sample of the Bulgarian data. A Granger causality test suggests the existence of dual causality between the fiscal and current account deficits. A vector autoregressive and a vector error correction model both reject the twin deficit hypothesis in the short run, but indicate that it might be valid in the long run.

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    Bibliographic Info

    Article provided by Institute of Public Finance in its journal Financial Theory and Practice.

    Volume (Year): 34 (2010)
    Issue (Month): 4 ()
    Pages: 357-377

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    Handle: RePEc:ipf:finteo:v:34:y:2010:i:4:p:357-377

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    Related research

    Keywords: current account targeting; twin deficit hypothesis; Granger causality; vector autoregressive analysis; vector error correction;

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    1. James Feyrer & Jay C. Shambaugh, 2009. "Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks," NBER Working Papers 15113, National Bureau of Economic Research, Inc.
    2. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Papers 728, Queen's University, Department of Economics.
    3. Gandolfo, Giancarlo & Goldberg, Michael D., 2005. "International Finance And Open-Economy Macroeconomics," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 263-266, April.
    4. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    5. Herrmann, Sabine & Jochem, Axel, 2005. "Determinants of current account developments in the central and east European EU member states - consequences for the enlargement of the euro area," Discussion Paper Series 1: Economic Studies 2005,32, Deutsche Bundesbank, Research Centre.
    6. Köhler, Matthias, 2005. "International Capital Mobility and Current Account Targeting in Central and Eastern European Countries," ZEW Discussion Papers 05-51, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. J. J. Polak, 2001. "The Two Monetary Approaches to the Balance of Payments," IMF Working Papers 01/100, International Monetary Fund.
    8. 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.
    9. Johnson, Harry G., 1977. "The monetary approach to the balance of payments : A nontechnical guide," Journal of International Economics, Elsevier, vol. 7(3), pages 251-268, August.
    10. Arnold C. Harberger, 2008. "Lessons from Monetary and Real Exchange Rate Economics," Cato Journal, Cato Journal, Cato Institute, vol. 28(2), Winter.
    11. Nelson Barbosa-Filho & Codrina Rada & Lance Taylor & Luca Zamparelli, 2006. "Fiscal, Foreign, And Private Net Borrowing: Widely Accepted Theories Don’T Closely Fit The Facts," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 177, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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    Cited by:
    1. Tosun, M. Umur & Iyidogan, Pelin Varol & Telatar, Erdinç, 2014. "The Twin Deficits in Selected Central and Eastern European Economies: Bounds Testing Approach with Causality Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 141-160, June.
    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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