Twin Deficits Hypothesis And Horioka-Feldstein Puzzle In Transition Economies
AbstractThe article’s main objective is to investigate the empirical link between the fiscal balance and the current account (i.e. the twin deficits phenomenon). The article focuses on transition economies which are according to their different characteristics divided into three major groups, i.e. Central and Eastern Europe (CEE), Southern and Eastern Europe (SEE) and the Commonwealth of Independent States (CIS). In fact, the inconsistency between public sector instability and currency overvaluations which led to current account balance deterioration was denoted as one of the key determinants of the balance of payments (currency) crisis seen in transition economies like Czech Republic (1997) and Russia (1998). Moreover, the importance of the so- called Horioka-Feldstein puzzle in transition economies is examined in order to draw some conclusions about the regions’ integration with international capital markets. For this purpose, pooled cross-sectional and time-series techniques are used to characterize the properties of current account variations across selected groups of transition economies in the 1990-2003 period. The empirical results suggest that high budget deficits in transition countries have signaled relatively low level of substitutability between private and public savings, implying a relatively high correlation between fiscal and external imbalances. Accordingly, special emphasis should be paid to the fiscal policy shift in these economies. Indeed, the main element of the economic policy reversal in transition countries should involve a substantial reduction of fiscal deficits in the future in order to reduce the probability of a balance of payments (currency) crisis. Finally, the article provides some evidence of the existence of the Horioka-Feldstein puzzle in transition economies.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0510020.
Length: 20 pages
Date of creation: 18 Oct 2005
Date of revision:
Note: Type of Document - pdf; pages: 20
Contact details of provider:
Web page: http://188.8.131.52
Find related papers by JEL classification:
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Helen Popper, 1990. "International capital mobility: direct evidence from long-term currency swaps," International Finance Discussion Papers 386, Board of Governors of the Federal Reserve System (U.S.).
- Jan Svejnar, 2001.
"Transition Economies: Performances and Challenges,"
William Davidson Institute Working Papers Series
415, William Davidson Institute at the University of Michigan.
- 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.
- Menzie David Chinn & Eswar Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries - An Empirical Exploration," IMF Working Papers 00/46, International Monetary Fund.
- Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
- Alam, Asad & Sundberg, Mark, 2002. "A decade of fiscal transition," Policy Research Working Paper Series 2835, The World Bank.
- Mechthild Schrooten & Sabine Stephan, 2003.
"Back on Track? Savings Puzzles in EU Accession Countries,"
Economics Working Papers
023, European Network of Economic Policy Research Institutes.
- Mechthild Schrooten & Sabine Stephan, 2002. "Back on Track?: Savings Puzzles in EU-Accession Countries," Discussion Papers of DIW Berlin 306, DIW Berlin, German Institute for Economic Research.
- Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
- Cevdet Denizer & Holger C. Wolf, 2000.
"The Saving Collapse during the Transition in Eastern Europe,"
World Bank Economic Review,
World Bank Group, vol. 14(3), pages 445-455, September.
- Denizer, Cevdet & Wolf, Holger C., 2000. "The savings collapse during the transition in Eastern Europe," Policy Research Working Paper Series 2419, The World Bank.
- Robert J. Barro, 1989.
"The Ricardian Approach to Budget Deficits,"
NBER Working Papers
2685, National Bureau of Economic Research, Inc.
- Olivier Blanchard & Francesco Giavazzi, 2002. "Current Account Deficits in the Euro Area: The End of the Feldstein Horioka Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 147-210.
- Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
- Michael M. Hutchison & Nirvikar Singh, 1993. "Long-term international capital mobility: new evidence from equilibrium real interest rate linkages," Pacific Basin Working Paper Series 93-06, Federal Reserve Bank of San Francisco.
- Donal McGettigan, 2000. "Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 189, International Monetary Fund.
- Martin Feldstein & Charles Horioka, 1979.
"Domestic Savings and International Capital Flows,"
NBER Working Papers
0310, National Bureau of Economic Research, Inc.
- Coricelli, Fabrizio & Jazbec, Bostjan, 2004.
"Real exchange rate dynamics in transition economies,"
Structural Change and Economic Dynamics,
Elsevier, vol. 15(1), pages 83-100, March.
- Coricelli, Fabrizio & Jazbec, Bostjan, 2001. "Real Exchange Rate Dynamics in Transition Economies," CEPR Discussion Papers 2869, C.E.P.R. Discussion Papers.
- Paolo Zanghieri, 2004. "Current Accounts Dynamics in new EU members: Sustainability and Policy Issues," Working Papers 2004-07, CEPII research center.
- Kearney, Colm & Monadjemi, Mehdi, 1990. "Fiscal policy and current account performance: International evidence on the twin deficits," Journal of Macroeconomics, Elsevier, vol. 12(2), pages 197-219.
- Daniel Levy, 2004.
"Is the Feldstein-Horioka Puzzle Really a Puzzle?,"
0402002, EconWPA, revised 12 May 2005.
- Stephen M. Miller & Frank S. Russek, 1989. "Are The Twin Deficits Really Related?," Contemporary Economic Policy, Western Economic Association International, vol. 7(4), pages 91-115, October.
- George Vamvoukas, 1999. "The twin deficits phenomenon: evidence from Greece," Applied Economics, Taylor and Francis Journals, vol. 31(9), pages 1093-1100.
- Ahmed, Shaghil, 1987. "Government spending, the balance of trade and the terms of trade in British history," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 195-220, September.
- Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2004. "Current accounts dynamics in OECD and EU acceding countries - an intertemporal approach," Working Paper Series 0311, European Central Bank.
- M. Faizul Islam, 1998. "Brazil's twin deficits: An empirical examination," Atlantic Economic Journal, International Atlantic Economic Society, vol. 26(2), pages 121-128, June.
- Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc.
- Jerry Coakley & Ana-Maria Fuertes & Fabio Spagnolo, 2004. "Is the Feldstein-Horioka Puzzle History?," Manchester School, University of Manchester, vol. 72(5), pages 569-590, 09.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.