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Bootstrap Panel Granger-Causality between Government Budget and External Deficits for the EU

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  • António Afonso
  • Christophe Rault

Abstract

We investigate the existence of Granger-causality between current account and government budget balances over the period 1970-2007, for different EU and OECD country groupings. We use the panel-data approach of Kónya (2006), which is based on SUR systems and Wald tests with country specific bootstrap critical values. Our results show a causal relation from budget deficits to current account deficits for several EU countries: Bulgaria, Czech Republic, Estonia, Finland, France, Italy, Hungary, Lithuania, Poland, and Slovakia, along the lines of the so-called twin-deficit relationship. Considering the effective real exchange rate in the SUR system does not substantially alter the results.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2581.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2581

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Keywords: panel causality tests; budget deficit; external imbalance; real exchange rates; EU; OECD;

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References

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  1. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, Elsevier, vol. 59(1), pages 47-76, January.
  2. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(2), pages 255-271, April.
  3. Afonso, António & Rault, Christophe, 2008. "Budgetary and external imbalances relationship: a panel data diagnostic," Working Paper Series, European Central Bank 0961, European Central Bank.
  4. Konya, Laszlo, 2006. "Exports and growth: Granger causality analysis on OECD countries with a panel data approach," Economic Modelling, Elsevier, Elsevier, vol. 23(6), pages 978-992, December.
  5. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 21(48), pages 597-638, October.
  6. 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.
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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, Institute for Economic Forecasting, vol. 0(2), pages 141-160, June.
  2. Guglielmo Caporale & Christophe Rault & Robert Sova & Anamaria Sova, 2010. "Environmental Regulation and Competitiveness: Evidence from Romania," William Davidson Institute Working Papers Series wp995, William Davidson Institute at the University of Michigan.
  3. Guglielmo Maria Caporale & Thouraya Hadj Amor & Christophe Rault, 2011. "Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach," CESifo Working Paper Series 3645, CESifo Group Munich.
  4. Arouri, Mohamed El Hedi & Ben Youssef, Adel & M'henni, Hatem & Rault, Christophe, 2012. "Energy Consumption, Economic Growth and CO2 Emissions in Middle East and North African Countries," IZA Discussion Papers 6412, Institute for the Study of Labor (IZA).
  5. 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.
  6. Algieri, Bernardina, 2013. "An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries," Economic Systems, Elsevier, Elsevier, vol. 37(2), pages 233-253.

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