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Twin Deficits in Small Open Baltic Economies

Author

Listed:
  • Veronika Å uliková

    () (Faculty of Economics, Technical University of Košice, Slovakia)

  • Marianna SiniÄ Ã¡ková

    () (Faculty of Economics, Technical University of Košice, Slovakia)

  • Denis Horváth

    () (Faculty of Economics, Technical University of Košice, Slovakia)

Abstract

This paper analyzes the twin deficit hypothesis - simultaneous current account deficit and budget deficit - in three small open Baltic countries (Estonia, Latvia and Lithuania) running under certain forms of the fixed exchange rate regime. The idea of twin deficits is tested using the vector error correction model (VECM), Granger causality tests and forecast variance decomposition, involving three variables: current account, budget balance, and investments. The new estimates confirm significant long-run positive relation between budget balance and current account in Estonia and Lithuania on one hand and the negative one in case of budget balance and investments in all three considered countries. The results of the analysis are specific to each country as they depend on their particular macroeconomic background. The contribution was elaborated within the project VEGA 1/0973/11.

Suggested Citation

  • Veronika Å uliková & Marianna SiniÄ Ã¡ková & Denis Horváth, 2014. "Twin Deficits in Small Open Baltic Economies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 227-239, March.
  • Handle: RePEc:voj:journl:v:61:y:2014:i:2:p:227-239
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    References listed on IDEAS

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    Cited by:

    1. Vesna Stojcevska & Mite Miteski, 2016. "Assessment of the Impact of Fiscal Policy on the Current Account – the Twin Deficit Hypothesis in the Case of Macedonian Economy," Working Papers 2016-01, National Bank of the Republic of Macedonia.

    More about this item

    Keywords

    Twin deficit; Current account; Budget balance; Vector error correction model; The Baltic countries;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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