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The Effect of Fiscal Deficit on the External Imbalances in the European Union

Author

Listed:
  • Kosta Josifidis
  • Radmila Dragutinović Mitrović
  • Sladjana Bodor

Abstract

This paper analyzes the effect of the fiscal deficit on the current account deficit in the European Union during the period 1995-2018. The purpose is to examine to what extent an increase in government spending affects the deterioration of terms of trade and contributes to increasing external imbalances. Econometric methods for heterogeneous panel data models are used to analyse the existence of a long-run relationship between the fiscal deficit and the current account. The empirical findings indicate that the twin deficits hypothesis is not confirmed for the whole European Union, but only for a certain number of member states, where a long-run relationship still exists, confirming the impact of the fiscal deficit on the current account. Key words: Fiscal deficit, Current account, Twin deficit hypothesis, Panel unit root tests, Panel cointegration analysis, Panel cointegration analysis, Heterogeneous panel data models with cross-sectional dependence. JEL: C01, C52, E62, F40.

Suggested Citation

  • Kosta Josifidis & Radmila Dragutinović Mitrović & Sladjana Bodor, 2021. "The Effect of Fiscal Deficit on the External Imbalances in the European Union," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 68(5), pages 625-652.
    • Handle: RePEc:voj:journl:v:68:y:2021:i:5:p:625-652:id:862
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    More about this item

    Keywords

    Fiscal deficit; Current account; Twin deficit hypothesis; Panel unit root tests; Panel cointegration analysis; Heterogeneous panel data models with cross-sectional dependence;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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