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Threshold cointegration and the short-run dynamics of twin deficit behaviour

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  • Holmes, Mark J.

Abstract

This paper examines the relationship between the current account and budget balances by means of a threshold cointegration approach advocated by Hansen and Seo (2002). Using US data covering 1947-2009, a long-run positive cointegrating relationship is confirmed. This supports the notion of a Keynesian twin deficits relationship. The short-run dynamics are investigated through an estimated threshold vector error correction model. Depending on the regime present, it is either the external or internal balance that is responsible for error correction. This has important implications for the use of fiscal policy to control the external balance.

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  • Holmes, Mark J., 2011. "Threshold cointegration and the short-run dynamics of twin deficit behaviour," Research in Economics, Elsevier, vol. 65(3), pages 271-277, September.
    • Handle: RePEc:eee:reecon:v:65:y:2011:i:3:p:271-277
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    18. Aviral Kumar TIWARI & Suresh K G & Mihai MUTAȘCU, 2015. "A Structural VAR analysis of Fiscal shocks on current accounts in Greece," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(604), A), pages 5-20, Autumn.
    19. 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.
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