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

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Author Info
António Afonso
Christophe Rault

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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 a panel-data approach 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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Paper provided by Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon. in its series Working Papers with number 2009/02.

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Date of creation: Jan 2009
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Handle: RePEc:ise:isegwp:wp22009

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Postal: Department of Economics, School of Economics and Management (ISEG), Technical University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: http://www.iseg.utl.pt/departamentos/economia/

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

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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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, vol. 59(1), pages 47-76, January. [Downloadable!] (restricted)
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  2. Konya, Laszlo, 2006. "Exports and growth: Granger causality analysis on OECD countries with a panel data approach," Economic Modelling, Elsevier, vol. 23(6), pages 978-992, December. [Downloadable!] (restricted)
  3. António Afonso & Christophe Rault, 2008. "Budgetary and external imbalances relationship - a panel data diagnostic," Working Paper Series 961, European Central Bank. [Downloadable!]
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  4. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April. [Downloadable!] (restricted)
  5. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense," Economic Policy, CEPR, CES, MSH, vol. 21(48), pages 597-638, October. [Downloadable!] (restricted)
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  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. [Downloadable!]
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This page was last updated on 2009-11-20.

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