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Investigating the Twin Deficits in Albania

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  • Ermira Kalaj
  • Mithat Mema

Abstract

This paper focuses on the direction of causality between budget deficit and current account deficit in Albania based on Granger causality tests. We use annual macroeconomic data for the period from 1992 to 2014. Before proceeding with the empirical analysis we test for unit root, the non-parametric Phillips-Peron test is conducted. The classical Granger test is extended including control variables such as private investment and savings, exchange rates, inflation rate, and interest rate. Empirical results support the evidence of a causal link between the twin deficits. In this sense fiscal budget cannot be considered as a fully controlled variable. A fiscal policy has important macroeconomic implications in the foreign trade indicators. To further investigate on the robustness of our results we examined the causal link between budget deficit and current account deficit based on the simultaneous equation. Results still persist in the bidirectional relationship between these two deficits.

Suggested Citation

  • Ermira Kalaj & Mithat Mema, 2015. "Investigating the Twin Deficits in Albania," EJSER European Journal of Social Sciences Education and Research Articles, European Center for Science Education and Research, vol. 3, January-A.
  • Handle: RePEc:eur:ejserj:124
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    References listed on IDEAS

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    1. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    2. Alberto Bagnai, 2006. "Structural breaks and the twin deficits hypothesis," International Economics and Economic Policy, Springer, vol. 3(2), pages 137-155, November.
    3. Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993. "Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 580-594, October.
    4. M. Faizul Islam, 1998. "Brazil's twin deficits: An empirical examination," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 26(2), pages 121-128, June.
    5. Kenyon, Thomas, 2008. "Tax Evasion, Disclosure, and Participation in Financial Markets: Evidence from Brazilian Firms," World Development, Elsevier, vol. 36(11), pages 2512-2525, November.
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    1. repec:eeb:articl:v:3:y:2017:n:4:p:350-359 is not listed on IDEAS

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