Testing the Twin Deficit Hypothesis: Evidence from the Republic of North Macedonia

Bucevska Vesna
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Bucevska Vesna: Ss. Cyril and Methodius University in Skopje, Faculty of Economics-Skopje

Business Systems Research, 2020, vol. 11, issue 3, 45-62

Abstract: BackgroundAn 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. ObjectivesThe objective of this paper is to test empirically the validity of the twin deficit hypothesis in the Republic of North Macedonia. Methods/ApproachTo 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). ResultsThese findings point to the conclusion that efforts focused on improving the current account imbalances through fiscal policy will be inefficient in the short run. ConclusionsHowever, 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.

Keywords: Twin deficit; Granger causality; VAR; VECM (search for similar items in EconPapers)
JEL-codes: C22 E62 F32 F41 H62 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:bit:bsrysr:v:11:y:2020:i:3:p:45-62:n:4

DOI: 10.2478/bsrj-2020-0026

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