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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.

Suggested Citation

  • 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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    Cited by:

    1. 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.
    2. Mohanty, Ranjan Kumar & Sahoo, Biresh K., 2017. "Examining the Eco-Macroeconomic Performance Index of India: A Data Envelopment Analysis Approach," Working Papers 17/202, National Institute of Public Finance and Policy.
    3. 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.
    4. Xie, Zixiong & Chen, Shyh-Wei, 2014. "Untangling the causal relationship between government budget and current account deficits in OECD countries: Evidence from bootstrap panel Granger causality," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 95-104.
    5. repec:ris:ecoint:0832 is not listed on IDEAS
    6. Samia OMRANE BELGUITH, 2016. "Twin deficit in MENA countries: an empirical investigation," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 123-146, June.
    7. Veronika Å uliková & Marianna SiniÄ Ã¡ková & Denis Horváth, 2014. "Twin Deficits in Small Open Baltic Economies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 227-239, March.
    8. repec:eee:jpolmo:v:40:y:2018:i:2:p:328-349 is not listed on IDEAS
    9. Yusuf Ekrem Akbas & Fuat Lebe, 2016. "Current Account Deficit, Budget Deficit and Saving Gap: Is the Twin or Triplet Deficit Hypothesis Valid in G7 Countries?," Prague Economic Papers, University of Economics, Prague, vol. 2016(3), pages 271-286.

    More about this item

    Keywords

    Twin deficits; Structural breaks; Cointegration; Granger causality; Vector Error Correction model;

    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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