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Untangling the causal relationship between government budget and current account deficits in OECD countries: Evidence from bootstrap panel Granger causality

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  • Xie, Zixiong
  • Chen, Shyh-Wei

Abstract

This study examines the causal relationship between the current account deficit and government budget deficit for eleven OECD countries by employing the panel Granger causality analysis. The econometric methodology used in this paper allows us to untangle the causal nexus between the current account deficit and government budget deficit and helps us to discriminate between competing theories on which hypothesis is applicable to these OECD countries. Among the main results, it is found that the Barro–Ricardo Equivalence hypothesis is applicable to France and the UK. When bootstrap critical values are used, our empirical findings indicate that there is bi-directional causality between the current account deficit and the government budget deficit for eleven OECD countries. The twin deficits hypothesis is supported either through the Keynesian hypothesis or through the current account targeting hypothesis.

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  • 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.
  • Handle: RePEc:eee:reveco:v:31:y:2014:i:c:p:95-104
    DOI: 10.1016/j.iref.2014.01.014
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    More about this item

    Keywords

    Twin deficits; Bootstrap; Panel data model; Granger causality;
    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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