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Revisiting the Twin Deficit Hypothesis for the Economies of Europe

Author

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  • Idil Uz Akdogan

    (Department of Economics, Yeditepe University, Istanbul – Turkey)

  • Hatice Kerra Geldi

    (Department of Economics, Yeditepe University, Istanbul – Turkey)

Abstract

This study presents empirical evidence linking the current account balance to its major determinants such as exchange rate, interest rate and budget balance in 7 of the EU member countries: Bulgaria, Greece, Ireland, Italy, Latvia, Portugal and Spain. Using the panel version of various cointegration tests, we find a long-run relationship between the current account and its determinants. The long-run coefficient of the interest rate is found statistically significant in all estimation techniques. On the other hand, weak evidence is found for the existence of the twin deficit hypothesis.

Suggested Citation

  • Idil Uz Akdogan & Hatice Kerra Geldi, 2013. "Revisiting the Twin Deficit Hypothesis for the Economies of Europe," The Journal of European Theoretical and Applied Studies, The Center for European Studies at Kirklareli University - Turkey, vol. 1(1), pages 53-65.
  • Handle: RePEc:kir:journl:v:1:y:2013:i:1:p:53-65
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    References listed on IDEAS

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    1. Otero, Jesus & Smith, Jeremy, 2000. "Testing for cointegration: power versus frequency of observation -- further Monte Carlo results," Economics Letters, Elsevier, vol. 67(1), pages 5-9, April.
    2. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
    3. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
    4. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
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