Twin Deficit Hypothesis in the South East European and Central East European Union Countries in the Course of Macroeconomic, Institutional and Different Crisis Factors

This paper aims to provide an empirical assessment of the twin deficit hypothesis in 6 South East European countries and 11 Central East European Union countries, using yearly data for the 2000-2022 period. The empirical model using Fixed Effects with Driscoll and Krey standard errors with time and country fixed effects confirm the twin deficit hypothesis with a flow of causation from fiscal to current account deficit in both groups of countries. The research also controls for the impact of other macroeconomic factors (GDP growth, real effective exchange rate, output gap, inflation, FDI), financial factors (monetary credit to the private sector), and institutional factors (transition progress, economic freedom, legal and property rights and governance indicators) on to current account deficit. The interaction between fiscal deficit and COVID-19 dummy outlines a current account deficit-widening effect, whereas when interacting with the Eurozone debt crisis dummy, fiscal deficit appears with an undistinguished effect on to current account deficit. The findings also outline narrowing (widening) effect of fiscal deficit on to current account deficit during the presence (absence) of the financial crisis. System GMM estimates confirm persistent effects of the current account deficit.