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An empirical analysis of the nexus between investment, fiscal balances and current account balances in Greece, Portugal and Spain

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  • Litsios, Ioannis
  • Pilbeam, Keith

Abstract

We provide new evidence that current account balances in Greece, Portugal and Spain have become non-stationary after the adoption of the euro implying that there is no long-run stable relationship between savings and investment contrary to the Feldstein-Horioka puzzle. This can be taken as evidence of unsustainable current account balances and loss of solvency for the underlying economies. Using the ARDL methodology we also report a statistical association between fiscal balances and current account balances, which implies that fiscal austerity can help these economies to reduce their current account deficits and restore their competitiveness. Our empirical evidence also suggests a particularly strong significant negative association between domestic investment and current account deficits in all three economies. The magnitude of this latter effect may have important policy implications concerning the ways in which investment is financed in order to alleviate current account deficits and improve the external competitiveness of these economies.

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  • Litsios, Ioannis & Pilbeam, Keith, 2017. "An empirical analysis of the nexus between investment, fiscal balances and current account balances in Greece, Portugal and Spain," Economic Modelling, Elsevier, vol. 63(C), pages 143-152.
    • Handle: RePEc:eee:ecmode:v:63:y:2017:i:c:p:143-152
    DOI: 10.1016/j.econmod.2017.02.003
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    3. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," EconomiX Working Papers 2018-51, University of Paris Nanterre, EconomiX.
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    5. Umer Jeelanie Banday & Ranjan Aneja, 2019. "Twin deficit hypothesis and reverse causality: a case study of China," Palgrave Communications, Palgrave Macmillan, vol. 5(1), pages 1-10, December.
    6. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," Working Papers hal-04141675, HAL.
    7. Yusuf D. Bulus & Nnaemeka E. Ohaegbu & Olufunmilayo S. Tajudeen & Chinecherem D. Okoronkwo & Danjuma S. Yusuf, 2023. "Fiscal Deficit Expansion and External Sector Imbalance in Nigeria: Implications for Monetary Policy," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(5), pages 1687-1703, May.
    8. Murai Taiki, 2024. "The Relationship Between the German Current Account and Financial Account: Evidence from the Toda-Yamamoto Causality Approach," The Economists' Voice, De Gruyter, vol. 21(1), pages 65-96.
    9. Afonso, António & Huart, Florence & Tovar Jalles, João & Stanek, Piotr, 2022. "Twin deficits revisited: A role for fiscal institutions?," Journal of International Money and Finance, Elsevier, vol. 121(C).
    10. Ioannis Litsios & Keith Pilbeam, 2024. "Explaining and correcting trade imbalances between the Northern and Southern Eurozone: An empirical investigation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 1079-1096, January.
    11. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-11.
    12. António Afonso & José Carlos Coelho, 2021. "60%, -4% And 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments," EconPol Working Paper 69, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    13. Henri Keranen & Sakari Lahdemaki, 2024. "Identification of fiscal SVAR-IVs in small open economies," Papers 2406.14382, arXiv.org, revised Oct 2024.
    14. Benedict Clements & Sanjeev Gupta & João Tovar Jalles & Saida Khamidova, 2020. "Terror and its Fiscal Consequences," Working Papers REM 2020/0140, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    15. Taiki Murai & Gunther Schnabl, 2021. "Macroeconomic Policy Making and Current Account Imbalances in the Euro Area," CESifo Working Paper Series 9153, CESifo.
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    17. António Afonso & José Carlos Coelho, 2021. "Current Account Targeting Hypothesis versus Twin Deficit Hypothesis: the EMU experience of Portugal," Working Papers REM 2021/0182, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    18. Ahmad Zubaidi Baharumshah & Siew-Voon Soon & Mark E. Wohar, 2019. "Fiscal stance, foreign capital inflows and the behavior of current account in the Asian countries," Empirical Economics, Springer, vol. 56(2), pages 523-549, February.
    19. Nikolina Kosteletou & Panagiotis Palaios & Evangelia Papapetrou, 2023. "New Evidence on the Asymmetric Linkages Between Fiscal and Current Account Balances," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(4), pages 4145-4169, December.
    20. Thanh Dinh Su & Canh Phuc Nguyen, 2021. "Twin balances, public governance and private investment: Quantile estimation for OECD countries," International Economics, CEPII research center, issue 165, pages 85-93.
    21. Ramona Tiganasu & Gabriela Carmen Pascariu & Dan Lupu, 2022. "Competitiveness, fiscal policy and corruption: evidence from Central and Eastern European countries," Oeconomia Copernicana, Institute of Economic Research, vol. 13(3), pages 667-698, September.
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    23. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 1-16.
    24. Irina-Marilena, Ban, 2022. "Introducing house prices to the intertemporal current account model: An application to the European Union," Economic Modelling, Elsevier, vol. 117(C).
    25. Ibrar Hussain & Umar Hayat & Md Shabbir Alam & Uzma Khan, 2024. "A Dynamic Analysis of the Twin-Deficit Hypothesis: the Case of a Developing Country," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(1), pages 25-52, March.

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    More about this item

    Keywords

    International financial integration; Twin deficits; Feldstein-Horioka; ARDL; Co-integration;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C - Mathematical and Quantitative Methods
    • E - Macroeconomics and Monetary Economics
    • F - International Economics
    • F - International Economics
    • F - International Economics
    • H - Public Economics

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