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An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries

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  • Algieri, Bernardina

Abstract

The present study investigates the causality relationship between the external (trade and current account) balance and government budget balance for five countries of the euro area's Mezzogiorno, namely Greece, Ireland, Italy, Portugal, and Spain. These countries, due to their weak economic and financial performances, have been labelled the GIIPS group. The analysis is implemented using two methodologies: the traditional Granger test and the approach developed by Toda–Yamamoto. The results reveal homogeneity in using both approaches and give support to the Ricardian theory, according to which there is no clear nexus between budget-current account balances and budget-trade balances. This implies that fiscal austerity could help the five peripheral countries to conform to the budget deficit criteria as established by the Stability and Growth Pact, but would not be effective in restraining external deficits.

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  • 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, vol. 37(2), pages 233-253.
    • Handle: RePEc:eee:ecosys:v:37:y:2013:i:2:p:233-253
    DOI: 10.1016/j.ecosys.2012.11.002
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    Cited by:

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    2. Mariam Camarero & Josep Lluís Carrion‐i‐Silvestre & Cecilio Tamarit, 2021. "External imbalances from a GVAR perspective," The World Economy, Wiley Blackwell, vol. 44(11), pages 3202-3245, November.
    3. 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.
    4. 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).
    5. Dumitriu, Ramona & Stefanescu, Răzvan, 2020. "Iluzii financiare, Partea întâi [Financial Illusions, Part 1]," MPRA Paper 101201, University Library of Munich, Germany, revised 17 Jun 2020.
    6. George Petrakos & Kostas Rontos & Luca Salvati & Chara Vavoura & Ioannis Vavouras, 2022. "Domestic vs. External Economic Sectors and the Political Process: Insights from Greece," Economies, MDPI, vol. 10(8), pages 1-13, August.
    7. 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.
    8. Afonso, António & Coelho, José Carlos, 2022. "The role of fiscal policies for external imbalances: Evidence from the European Union," Economic Systems, Elsevier, vol. 46(2).
    9. 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.
    10. Virtue Ekhosuehi & Francis Oyegue, 2015. "On the state of budgetary balance over time via the one-way classification model," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 25(3), pages 5-16.
    11. Carlos Alberto Carrasco, 2016. "Causality between external balance and (some) fiscal variables: Preliminary results for the Eurozone," Economics and Business Letters, Oviedo University Press, vol. 5(3), pages 80-86.
    12. José Carlos Coelho, 2020. "The relationship between budget deficit and external deficit: the case of Portugal," Working Papers REM 2020/0116, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    13. Joseph Mawejje & Nicholas M. Odhiambo, 2020. "The determinants of fiscal deficits: a survey of literature," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 67(3), pages 403-417, September.
    14. Wong Hock Tsen, 2014. "External Balance And Budget In Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 10(2), pages 37-54.
    15. 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.
    16. Veronika Šuliková & Anna Tykhonenko, 2017. "The Impact Of Public Debt On The Twin Imbalances In Europe: A Threshold Model," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 62(213), pages 27-44, April - J.
    17. Pilbeam, K. & Litsios, I., 2015. "An Empirical Analysis of the Nexus between Investment, Fiscal Balances and Current Account Balances in Greece, Portugal and Spain," Working Papers 15/18, Department of Economics, City University London.

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    More about this item

    Keywords

    Budget deficits; External deficits; Causality tests; GIIPS group;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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