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The relationship between budget deficit and external deficit: the case of Portugal

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Abstract

This paper makes an empirical analysis applied to Portugal between 1999 and 2016 which investigates the existence of a causal relationship between the budget balance (overall and primary) and the external balance (goods and services and current). Using Granger Causality Test (1969) and the Toda-Yamamoto Methodology (1995), we conclude that there is causality between the overall budget balance and the current external balance and between the primary budget balance and the current external balance, which provides support to the Twin Deficits Hypothesis. We also found some evidence to verify the Current Account Targeting Hypothesis, which points to the possibility of bi-directional causality between the budget deficit and the external deficit in Portugal.

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  • 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.
    • Handle: RePEc:ise:remwps:wp01162020
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    Cited by:

    1. António Afonso & José Carlos Coelho, 2021. "Current Account Targeting Hypothesis versus Twin Deficit Hypothesis: the EMU experience of Portugal," Working Papers REM 2021/0182, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. José Carlos Coelho, 2020. "A new assessment of the Troika ´s economic policy for Portugal in 2012 following an Input-Output approach," Working Papers REM 2020/0121, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    More about this item

    Keywords

    budget deficit; external deficit; Portugal; Granger Causality Test (1969); Toda-Yamamoto Methodology (1995);
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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