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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 ex- change rate regime. The idea of twin deficits is tested using the vector error correction model (VECM), Granger causality tests...
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Citations
... Several empirical studies have been conducted to test the nexus between FD and CAD. Some of the studies strongly supported the Keynesian approach, which implies a relationship between FD and CAD (Holmes, 2010;Kosteletou, 2013;Okoli et al., 2021;Šuliková et al., 2014;Sharma et al., 2021). On the contrary, literature is also available on the Ricardian equivalence approach, which deny any relationship between FD and CAD (Barro, 1989;Kim & Kim, 2006;Mumtaz & Munir, 2016). ...
The primary focus of this study is to examine the long-term and short-term impact of fiscal deficit (FD) on the current account deficit (CAD) in India over the period of 1980 to 2021 in the presence of inflation and exchange rate. For the estimation of data series, the study employed autoregressive distributed lag (ARDL) co-integration test and Gregory Hansen (GH) co-integration test with endogenous structural break. The empirical results from ARDL bounds tests fail to provide a long-run relationship for the variables. The threshold co-integration test (GH) estimation suggests a strong evidence of a co-integration relationship for the variables and the break year is found in 2005. Thus, the findings validate the twin deficit hypothesis in the long-run as the FD has a positive significant effect on a CAD in India. Similarly, the long-run estimates of inflation have a positive significant effect on the CAD. It implies that an increase in rate of inflation distorts the CAD in the long-run. Consequently, the government of India should control the price hike and make macroeconomic situations favourable for domestic tradable sectors. The results from the Granger causality technique show bidirectional causality between FD and CAD implies the twin deficit in India. Based on the empirical findings, it may be argued that the Central Bank of India should try to reduce the prolonged CADs and retain stability in the domestic currency.
... Given, the disagreements among reviewed theoretical and empirical literature regarding the nature and direction of causal relationships, Aqeel and Nishat 2000;Mukhtar, Zakaria, and Ahmed 2007;Kim and Roubini 2008;Šuliková, Siničáková, and Horváth 2014;Helmy 2018 urge the use of Granger causality analysis to explore the direction of the relationship between the fiscal deficit and the trade deficits. In recent studies, Ravinthirakumarana, Selvanathan, and Selvanathan (2016) have concluded unidirectional causality running from fiscal debt to the trade deficit in Pakistan's case. ...
This study is an attempt to explore the short-term and long-term effects of
the fiscal deficit along with other macroeconomic variables on the
deteriorating trade deficit of Pakistan from 1980 to 2018 by using time
series estimation techniques. The result of the autoregressive distributed
lag (ARDL) bounds testing approach and error correction term revealed the
existence of cointegration among variables of interest. The estimated
long-run and short-run results of the ARDL approach showed a significant
positive effect of fiscal deficit on Pakistan's trade deficit in the
short-run, whereas a significant adverse effect is observed in the long-run.
The findings validated the twin deficit hypothesis in the short-run, whereas
twin divergence proposition is observed in the long run. The study suggests
prudent fiscal and monetary policies to make macroeconomic conditions
favorable for the development and competitiveness of domestic production
sectors engaged in the international trade.
... Saleh and Chowdhury (2007) found evidence for only long-run equilibrium for a study conducted for Sri-Lanka. Šuliková, Siničáková, and Horváth (2014) found mix results of uni-direction and bidirectional causality for a study conducted for the Baltic countries of Estonia, Latvia and Lithuania. ...
This study tests for the validity of the twin-deficit hypothesis in Nigeria for the period 1981 – 2018 and further seeks to ascertain the role of macroeconomic fundamentals in driving this hypothesis using the non-linear autoregressive distributed lag (NARDL) model and structural vector autoregressive (SVAR) model. With evidence from granger causality test, the results obtained for the NARDL model support the validation of the twin-deficit hypothesis for the Nigerian economy. As long-run equilibrium exists, it was further established that the twin deficits were majorly driven by the degrees of financial and trade openness in Nigeria as no substantial shock effects of the twin deficits were traceable to any of the macroeconomic fundamentals. It is therefore recommended that policy makers in Nigeria should properly sequence the degree of economic openness to ensure the overall health of the economy.
... Pour ce qui est de l ' hypothèse des déficits jumeaux conditionnée au niveau de la dette publique, les études réalisées ont essentiellement porté sur les pays européens et les pays du Moyen Orient et de l ' Afrique du Nord ( MENA). Elles sont parvenues aux résultats selon lesquels, les déficits jumeaux ne sont plus valides lorsque la dette publique est supérieure à 80-90% du PIB (Nickel & Vansteenkiste, 2008) voire 110% (Nickel & Tudyka, 2014), voire 93% (Sulikova, Sinicakova, & Horvath, 2014). Toutefois, ces études ont eu pour inconvénient majeur d ' avoir marginalisé l ' approche de la NAK tant dans les analyses théoriques que dans la vérification empirique de l ' hypothèse des déficits jumeaux. ...
This research paper mainly aims to re-examine the hypothesis of twin deficits in Congo using both a linear model and a threshold effect model with public debt as the threshold variable. It comes out that the two models converge and confirm the hypothesis of twin deficits in Congo. However, the only difference is that the threshold effect model determined the public debt threshold at 102.94% which changes the budget deficit path of the external deficit. This public debt threshold is much higher than the public debt sustainability threshold, which is around 40%. The difference between the two public debt thresholds has strong implications upon the economic policy. Thus, for public debt levels below 40%, the problem of rebalancing the external balance does not matter. Between 40% and 102.94%, a gradual fiscal consolidation is recommended to restore external balance. Above 102.94%, shock therapy should be considered first, then gradual fiscal consolidation should be considered when the debt falls below 102.94%.
... The obtained findings are in line with the results of previous empirical studies on the existence of twin deficit hypothesis in Macedonia (Sadiku et al., 2018 andStojcevska andMiteski, 2016). They are also in conformity with the results of previous research of small opened economies that are highly exposed and sensitive to external price shocks (Margani and Ricciuti, 2004;Sobrino, 2013;Šuliková et al., 2014). ...
Background
An econometric analysis of the twin deficit hypothesis is of special importance for the Republic of North Macedonia in view of its perspective membership in the European Union and from the point of view of its macroeconomic stability in the long run.
Objectives
The objective of this paper is to test empirically the validity of the twin deficit hypothesis in the Republic of North Macedonia.
Methods/Approach
To achieve this objective, we used actual quarterly data on Macedonia's budget and the current account deficit in the period from the first quarter of 2005 until the fourth quarter of 2017 and applied several econometrics methods: the Granger causality, a vector autoregressive (VAR) and a vector error correction model (VECM).
Results
These findings point to the conclusion that efforts focused on improving the current account imbalances through fiscal policy will be inefficient in the short run.
Conclusions
However, the existence of a long run relationship between the budget deficit and the current account deficit indicates the necessity of policy initiatives focused not only on reducing the budget deficit, but also on improving the external position of the country though export promotion.
... A number of researchers have tested whether the twin deficits hypothesis is valid for other countries or country groups as well. Among this new strand of studies, we can list the studies conducted by Ahmed and Ansari (1994) for Canada, Elif Akbostancı and Gül İpek Tunç (2002) and Burcu Kıran (2011) for Turkey, Chul-Hwan Kim and Donggeun Kim (2006) for South Korea, Baharumshah and Lau (2007) for Thailand, Cosimo Magazzino (2012) for Italy, César R. Sobrino (2013) for Peru, Carlos Fonseca Marinheiro (2008) and Osama El-Baz (2014) for Egypt, BigBen Chukwuma Ogbonna (2014) for South Africa, Dominick Salvatore (2006) for the G-7 countries, Baharumshah, Lau, and Khalid (2006) for the ASEAN-4 countries, António Afonso, Christophe Rault, and Christophe Estay (2013) and Emmanouil Trachanas and Constantinos Katrakilidis (2013) for five EU countries, Šuliková, Siničáková, and Denis Horváth (2014) for three Baltic economies (Estonia, Latvia and Lithuania), and Xie and Chen (2014) for OECD countries. ...
This study examines the validity of the twin or triple deficits hypotheses
using bootstrap panel Granger causality analysis and an annual panel dataset of
six post-communist countries (Russia, Poland, Ukraine, Romania, the Czech Republic,
and Hungary) during the period from 1994 to 2015. The results corroborate neither
the validity of the twin deficits hypothesis nor its extended version, the triple deficits
hypothesis, for any of the sample countries. In other words, we find no Granger causal
relationship between budget deficits and external (trade or current account) deficits or
among budget deficits, private savings-investment deficits, and external deficits in the
countries examined. On the basis of these results, we reject the Keynesian view of
the twin or triple deficits hypotheses. Rather, we confirm the Ricardian view.
... A number of researchers have tested whether the twin deficits hypothesis is valid for other countries or country groups as well. Among this new strand of studies, we can list the studies conducted by Ahmed and Ansari (1994) for Canada, Elif Akbostancı and Gül İpek Tunç (2002) and Burcu Kıran (2011) for Turkey, Chul-Hwan Kim and Donggeun Kim (2006) for South Korea, Baharumshah and Lau (2007) for Thailand, Cosimo Magazzino (2012) for Italy, César R. Sobrino (2013) for Peru, Carlos Fonseca Marinheiro (2008) and Osama El-Baz (2014) for Egypt, BigBen Chukwuma Ogbonna (2014) for South Africa, Dominick Salvatore (2006) for the G-7 countries, Baharumshah, Lau, and Khalid (2006) for the ASEAN-4 countries, António Afonso, Christophe Rault, and Christophe Estay (2013) and Emmanouil Trachanas and Constantinos Katrakilidis (2013) for five EU countries, Šuliková, Siničáková, and Denis Horváth (2014) for three Baltic economies (Estonia, Latvia and Lithuania), and Xie and Chen (2014) for OECD countries. ...
This study examines the validity of the twin or triple deficits hypotheses using bootstrap panel Granger causality analysis and an annual panel dataset of six post-communist countries (Russia, Poland, Ukraine, Romania, the Czech Republic, and Hungary) during the period from 1994 to 2015. The results corroborate neither the validity of the twin deficits hypothesis nor its extended version, the triple deficits hypothesis, for any of the sample countries. In other words, we find no Granger causal relationship between budget deficits and external (trade or current account) deficits or among budget deficits, private savings-investment deficits, and external deficits in the countries examined. On the basis of these results, we reject the Keynesian view of the twin or triple deficits hypotheses. Rather, we confirm the Ricardian view.
... Therefore, it can be argued that the budget deficit has a strong effect on the current account balance in this line of reasoning, implying a causal relationship running from the budget balance to the current account balance. Using time series techniques such as co-integration, error correction and/or causality analysis Dibooglu (1997) for US, Vamvoukas (1999) for Greece, Leachman and Francis (2002) for US, Akbostancı and Tunç (2002) for Turkey, Fidrmuc (2003) for some OECD and transition countries, Parikh and Rao (2006) for India, Grier and Ye (2009) for US, Perera and Liyanage (2012) for Sri Lanka, Trachanas and Katrakilidis (2013) for a group of European countries, Šuliková, Siničáková and Horváth (2014) for 3 baltic countries present evidence for twin deficit hypothesis. Some studies, such as Bagnai (2010) for Central and Eastern European countries, Chinn and Prasad (2003) for a large set of developing and industrial countries, Mohammadi (2004) for 20 industrial and 43 developing countries, Salvatore (2006) for G7 countries, Bartolini and Lahiri (2006) for a group of 26 countries and 18 OECD countries, Forte and Magazzino (2013) for European countries, obtain similar results by means of Ordinary Least Squares or panel data methods. ...
We apply nonlinear autoregressive distributed lag (NARDL) approach to investigate the relationship between budget deficit and current account deficit in Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia. Our results indicate that changes in current account deficit have a significant effect on the budget deficit in Poland and Romania in the long-run and Croatia, Poland, Romania and Slovakia in the short-run. On the other hand, changes in budget deficit significantly affect the current account deficit in Czech Republic, Hungary, and Slovakia in the long-run and in Czech Republic, Hungary, Slovakia, and Romania in the short-run. Therefore, we conclude that the twin deficit hypothesis is valid for Czech Republic, Hungary and Slovakia but not for the case of Poland, Croatia, Romania and Slovenia in the long-run. Finally, we also present evidence for the existence of asymmetric effects in this context.
... It is also in accordance with the Mundell-Fleming Model of an open economy and suggests that higher government expenditures would increase domestic interest rates, which would attract foreign capital and influence the appreciation of the domestic currency. The consequence would be a reduction in exports, an increase in imports, i.e. it would worsen the condition of the current account (Sulikova, Sinicakova & Horvath, 2014). For a given level of private savings and investments, the budget and the current account will move in the same direction and with the same intensity. ...
The concept of a twin deficit relates to a budget deficit and a current account deficit. In the literature, there is no unique answer to the question of what the causal relationship between these deficits is. In any case, the existence of these deficits indicates that the spending of a country is higher than its production and investments are greater than savings. The form of financing could be a potential problem, as well as the manner of the use of these funds. Crisis situations contribute to the increasing importance of the issue. In these situations, those countries where a budget deficit chronically appears and which do not have enough domestic savings to finance excessive government spending will be in a worse position. The Republic of Serbia belongs to the group of countries where a budget deficit is a chronic phenomenon financed by external sources; therefore, the paper will analyze the issue of a twin deficit.
... Veronika Šuliková, Marianna Siničáková, and Denis Horváth (2014) analysed the twin deficit hypothesis in three small open Baltic countries (Estonia, Latvia and Lithuania) during the period 1999:Q1-2011:Q2. Conclusions based on the Vector error correction model (VECM) indicate the validity of the twin deficit hypothesis in the case of Estonia and Lithuania. ...
The general theory of twin deficits hypothesis does not consider specific characteristics of domestic tax systems, i.e. whether the revenue side of the budget is dominated by indirect or by direct taxes. The main hypothesis of the paper is that in countries with fiscal systems dominated by indirect taxes, the deterioration of the current account balance would imply higher fiscal revenues due to larger imports and consumption. The hypothesis is based on the characteristics of domestic tax systems of Bulgaria, Croatia, Poland and Ro- mania in which indirect tax revenues account for the majority of total budget tax revenues. Results suggest that the co-movements of the current account and the fiscal balance cannot be explained by the twin deficit theory in countries with indirect tax-oriented systems. These results imply that only the structural economic transformation and export orientation of the economy may reverse the causality direction between two deficits.
