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The twin deficits hypothesis: Revisiting an EMU country

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  • Kalou, Sofia
  • Paleologou, Suzanna-Maria

Abstract

We re-examine the issue of the twin deficits hypothesis since recent theoretical and empirical analysis suggests that this hypothesis is subject to structural shifts, the identification of which is very important for policymakers in order to take the correct decisions to overcome situations of economic turmoil. We utilise a different empirical approach and we extend the data sets. We use a multivariate Vector Error Correction framework including the endogenous determination of structural breaks, to determine the causal relation between the budget deficit and the current account deficit for Greece. The two deficits are found to be positively linked through the Current Account Targeting Hypothesis.

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  • Kalou, Sofia & Paleologou, Suzanna-Maria, 2012. "The twin deficits hypothesis: Revisiting an EMU country," Journal of Policy Modeling, Elsevier, vol. 34(2), pages 230-241.
    • Handle: RePEc:eee:jpolmo:v:34:y:2012:i:2:p:230-241
    DOI: 10.1016/j.jpolmod.2011.06.002
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    More about this item

    Keywords

    Twin deficits; Structural breaks; Cointegration; Granger causality; Vector Error Correction model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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