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When Inflation Drives Twin Deficits Catch in the Eurozone

Author

Listed:
  • Barbara Brixova

    (Technical University of Kosice, Kosice, Slovakia; Universit C te d'Azur, CNRS, GREDEG, France)

  • Veronika Sulikova

    (Technical University of Kosice, Kosice, Slovakia)

  • Marianna Sinicakova

    (Technical University of Kosice, Kosice, Slovakia)

  • Val ria Levandovska

    (Technical University of Kosice, Kosice, Slovakia)

Abstract

The paper explores the impact of inflation on the validity of the twin deficits hypothesis (TDH) in the Eurozone countries, focussing on how different inflation levels influence twin deficit existence (i.e., a positive relation between fiscal and current account deficit) and how inflation affects current account balance in different inflation intervals. Despite extensive existing research on twin deficits, the specific role of inflation in twin deficits remains underexplored. Using Granger causality tests, cross-correlations, and panel data models, we tested the twin deficit hypothesis at varying inflation levels. According to our findings, if inflation exceeds 2%, the TDH holds. On the contrary, during periods of lower inflation (below 0% or between 0% and 1.7%), the TDH is either invalid or current account is unaffected by inflation. These results highlight the importance of targeted fiscal consolidation during high inflation periods to prevent further current account deterioration. By examining the link between inflation and twin deficits, this study not only addresses a key gap in the literature on twin deficits but also lays the groundwork for future investigations into the complex interplay between inflation and macroeconomic imbalances in the Eurozone.

Suggested Citation

  • Barbara Brixova & Veronika Sulikova & Marianna Sinicakova & Val ria Levandovska, 2025. "When Inflation Drives Twin Deficits Catch in the Eurozone," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 27(70), pages 1127-1127, August.
    • Handle: RePEc:aes:amfeco:v:27:y:2025:i:70:p:1127
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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