The twin deficits in OECD countries: cointegration analysis with regime shifts
We investigate the question of whether or not government budget deficits and real interest rates have a long-run relationship with the current account of the balance of payments in 23 Organization for Economic cooperation and Development (OECD) countries. Such an investigation is important, since large and persistent budget deficits may impose strains on the foreign exchange markets and are considered by some to be one of the main causes of crises in international financial markets. We permit regime shifts in the cointegration analysis, which extends empirical modelling relative to existing studies. We find that the admission of regime shifts substantially influences the empirical conclusions: we find a long-run relationship between budget deficits, real interest rate and current account deficit in 13 out of 23 countries, whereas the number of countries with apparent long-run relationships is dramatically reduced when regime shifts are not permitted. We argue that, when structural breaks are taken into account, it seems to be the countries with a more extensive financial infrastructure in which the twin deficits are less likely to be conjoined.
Volume (Year): 16 (2009)
Issue (Month): 11 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAEL20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAEL20|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Feldstein, Martin & Horioka, Charles, 1980.
"Domestic Saving and International Capital Flows,"
Royal Economic Society, vol. 90(358), pages 314-29, June.
- Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
- Barro, Robert J, 1974.
"Are Government Bonds Net Wealth?,"
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
- Anita Ghatak & Subrata Ghatak, . "Budgetary Deficits and Ricardian Equivalence: The Case of India, 1950-1986," Discussion Papers in Public Sector Economics 96/3, Department of Economics, University of Leicester.
- Menzie David Chinn & Eswar Prasad, 2000.
"Medium-Term Determinants of Current Accounts in Industrial and Developing Countries; An Empirical Exploration,"
IMF Working Papers
00/46, International Monetary Fund.
- Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
- Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
- Gregory, Allan W. & Hansen, Bruce E., 1996.
"Residual-based tests for cointegration in models with regime shifts,"
Journal of Econometrics,
Elsevier, vol. 70(1), pages 99-126, January.
- Tom Doan, . "RATS programs to replicate results from Gregory and Hansen(1996) JOE article," Statistical Software Components RTZ00081, Boston College Department of Economics.
- Tom Doan, . "GREGORYHANSEN: RATS procedure to implement Gregory-Hansen test for Cointegration with breaks," Statistical Software Components RTS00082, Boston College Department of Economics.
- Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
- Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
- Ghatak, Anita & Ghatak, Subrata, 1996. "Budgetary deficits and Ricardian equivalence: The case of India, 1950-1986," Journal of Public Economics, Elsevier, vol. 60(2), pages 267-282, May.
- Ahmed M. Khalid & Teo Wee Guan, 1999. "Causality tests of budget and current account deficits: Cross-country comparisons," Empirical Economics, Springer, vol. 24(3), pages 389-402.
- Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993.
"Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?,"
Western Economic Association International, vol. 31(4), pages 580-94, October.
- Jeffrey A. Rosensweig & Ellis W. Tallman, 1991. "Fiscal policy and trade adjustment: are the deficits really twins?," Working Paper 91-2, Federal Reserve Bank of Atlanta.
- Anoruo, Emmanuel & Ramchander, Sanjay, 1998. "Current account and fiscal deficits: Evidence from five developing economies of Asia," Journal of Asian Economics, Elsevier, vol. 9(3), pages 487-501.
When requesting a correction, please mention this item's handle: RePEc:taf:apeclt:v:16:y:2009:i:11:p:1155-1164. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.