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Twin Deficits Hypothesis And Horioka-Feldstein Puzzle In Transition Economies

  • Aleksander Aristovnik

    (Faculty of Administration)

The article’s main objective is to investigate the empirical link between the fiscal balance and the current account (i.e. the twin deficits phenomenon). The article focuses on transition economies which are according to their different characteristics divided into three major groups, i.e. Central and Eastern Europe (CEE), Southern and Eastern Europe (SEE) and the Commonwealth of Independent States (CIS). In fact, the inconsistency between public sector instability and currency overvaluations which led to current account balance deterioration was denoted as one of the key determinants of the balance of payments (currency) crisis seen in transition economies like Czech Republic (1997) and Russia (1998). Moreover, the importance of the so- called Horioka-Feldstein puzzle in transition economies is examined in order to draw some conclusions about the regions’ integration with international capital markets. For this purpose, pooled cross-sectional and time-series techniques are used to characterize the properties of current account variations across selected groups of transition economies in the 1990-2003 period. The empirical results suggest that high budget deficits in transition countries have signaled relatively low level of substitutability between private and public savings, implying a relatively high correlation between fiscal and external imbalances. Accordingly, special emphasis should be paid to the fiscal policy shift in these economies. Indeed, the main element of the economic policy reversal in transition countries should involve a substantial reduction of fiscal deficits in the future in order to reduce the probability of a balance of payments (currency) crisis. Finally, the article provides some evidence of the existence of the Horioka-Feldstein puzzle in transition economies.

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Paper provided by EconWPA in its series International Finance with number 0510020.

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Length: 20 pages
Date of creation: 18 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0510020
Note: Type of Document - pdf; pages: 20
Contact details of provider: Web page: http://econwpa.repec.org

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