THE IMPACT OF PUBLIC DEBT ON THE TWIN IMBALANCES IN EUROPE: A THRESHOLD MODEL

Veronika Šuliková and Anna Tykhonenko ()

Economic Annals, 2017, vol. 62, issue 213, 27 - 44

Abstract: Recent empirical research rejecting twin deficits in indebted countries and current account imbalances adjustment in Europe led to the idea to test the twin imbalances at different public debt-to-GDP intervals. The analysis covers 14 EU countries over the time period 1995-2012. A panel data threshold model with fixed effects estimates two debt-toGDP thresholds (40.2% and 96.6%), which determine three debt-to-GDP intervals in the twin relationship. If public debtto-GDP is less than 40.2%, the model determines a negative relationship (twin divergence) between budget balance and current account. Twin deficits (surpluses) are confirmed exclusively if debt-to-GDP is in the interval between 40.2% and 96.6%. A twin divergence is also confirmed if public debt-to-GDP is more than 96.6% (e.g., as in Greece and Italy). The results confirm that increased indebtedness in European countries contributed to their current account imbalance adjustment.

Keywords: twin imbalances; twin deficits; twin divergence; public debt; panel data threshold model (search for similar items in EconPapers)
JEL-codes: F32 F41 H60 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Working Paper: The Impact of Public Debt on the Twin Imbalances in Europe: a Threshold Model (2017)
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