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Bootstrap Panel Granger-Causality Between Government Budget and External Deficits for the EU

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  • António Afonso
  • Christophe Rault

Abstract

We investigate the existence of Granger-causality between current account and government budget balances over the period 1970-2007, for different EU and OECD country groupings. We use a panel-data approach based on SUR systems and Wald tests with country specific bootstrap critical values. Our results show a causal relation from budget deficits to current account deficits for several EU countries: Bulgaria, Czech Republic, Estonia, Finland, France, Italy, Hungary, Lithuania, Poland, and Slovakia, along the lines of the so-called twin-deficit relationship. Considering the effective real exchange rate in the SUR system does not substantially alter the results.

Suggested Citation

  • António Afonso & Christophe Rault, 2009. "Bootstrap Panel Granger-Causality Between Government Budget and External Deficits for the EU," Working Papers Department of Economics 2009/02, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
  • Handle: RePEc:ise:isegwp:wp22009
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    References listed on IDEAS

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    1. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense [‘Temporary and permanent government spending in an open economy: some evidence for the United Kingdom’]," Economic Policy, CEPR;CES;MSH, vol. 21(48), pages 598-638.
    2. Konya, Laszlo, 2006. "Exports and growth: Granger causality analysis on OECD countries with a panel data approach," Economic Modelling, Elsevier, vol. 23(6), pages 978-992, December.
    3. António Afonso & Christophe Rault, 2008. "Budgetary and External Imbalances Relationship : a Panel Data Diagnostic," Working Papers Department of Economics 2008/45, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    4. 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.
    5. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
    6. B. Douglas Bernheim, 1988. "Budget Deficits and the Balance of Trade," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 1-32, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Algieri, Bernardina, 2013. "An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries," Economic Systems, Elsevier, vol. 37(2), pages 233-253.
    2. A. Phiri, 2019. "Asymmetries in the revenue–expenditure nexus: new evidence from South Africa," Empirical Economics, Springer, vol. 56(5), pages 1515-1547, May.
    3. Arouri, Mohamed El Hedi & Caporale, Guglielmo Maria & Rault, Christophe & Sova, Robert & Sova, Anamaria, 2012. "Environmental Regulation and Competitiveness: Evidence from Romania," Ecological Economics, Elsevier, vol. 81(C), pages 130-139.
    4. Arouri, Mohamed El Hedi & Ben Youssef, Adel & M'henni, Hatem & Rault, Christophe, 2012. "Energy consumption, economic growth and CO2 emissions in Middle East and North African countries," Energy Policy, Elsevier, vol. 45(C), pages 342-349.
    5. Khalid Khan & Chi-Wei Su & Ran Tao & Lin-Na Hao, 2020. "Urbanization and carbon emission: causality evidence from the new industrialized economies," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 22(8), pages 7193-7213, December.
    6. Tosun, M. Umur & Iyidogan, Pelin Varol & Telatar, Erdinç, 2014. "The Twin Deficits in Selected Central and Eastern European Economies: Bounds Testing Approach with Causality Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 141-160, June.
    7. Sarah El-Khishin & Jailan El-Saeed, 2021. "The Twin Deficit Hypothesis in the MENA Region: Do Geopolitics Matter?," Economies, MDPI, vol. 9(3), pages 1-17, September.
    8. Guglielmo Maria Caporale & Thouraya Hadj Amor & Christophe Rault, 2011. "Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach," CESifo Working Paper Series 3645, CESifo.
    9. Afonso, António & Coelho, José Carlos, 2022. "The role of fiscal policies for external imbalances: Evidence from the European Union," Economic Systems, Elsevier, vol. 46(2).
    10. 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.
    11. Cagri Esener & Brigitte Granville & Roman Matousek, 2022. "Choosing the Optimal Tool for Fiscal Adjustment or Living under Fiscal Constraints: Panel Evidence from Selected OECD Countries," Economic Research Guardian, Weissberg Publishing, vol. 12(1), pages 2-29, June.
    12. Obeng, Samuel, 2015. "A Causality Test of the Revenue-Expenditure Nexus in Ghana," MPRA Paper 63735, University Library of Munich, Germany, revised 25 Feb 2015.
    13. José Carlos Coelho, 2020. "The relationship between budget deficit and external deficit: the case of Portugal," Working Papers REM 2020/0116, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    More about this item

    Keywords

    panel causality tests; budget deficit; external imbalance; real exchange rates; EU; OECD.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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