Causality and the long-term relationship between external balance and public balance in the Eurozone

Carlos Carrasco and Adrian Hernandez-del-Valle
Additional contact information
Adrian Hernandez-del-Valle: Full Professor of Economics and Chief of the Department of Graduate Studies and Research. Escuela Superior de Economía, Instituto Politécnico Nacional (SEPI-ESE-IPN), Mexico.

Cuadernos de Economía - Spanish Journal of Economics and Finance, 2018, vol. 41, issue 117, 275-290

Abstract: After the beginning of the financial crisis, European external imbalances —mainly in the southern countries— were explicitly or implicitly linked to the behaviour of the public finances under the so-called twin deficits hypothesis. At a theoretical level, a worsening of a government’s budgetary balance exerts upward pressure on real interest rates, which attracts capital flows –because of the relatively higher returns– resulting in an appreciation of the domestic currency and a worsening of external balances. In this article, we analyse the causality and long-term relationship between external balance and some fiscal variables for a set of ten Eurozone countries. According to our results, there is no evidence of a common causality pattern between the public balance and the external balance among different groups of Eurozone countries. In addition, when the analysis is carried out at individual level, only Spain and Finland present a long-term relationship between fiscal variables and the external balance. However, these relationships do not behave as predicted by the twin deficits hypothesis. These results call into question those symmetrical fiscal policies aimed (explicitly or implicitly) at correcting external imbalances in these countries.

Keywords: Twin deficits hypothesis; European external imbalances; Fiscal deficits; ARDL bound testing (search for similar items in EconPapers)
JEL-codes: F32 F41 H62 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
https://repositorio.uam.es/bitstream/handle/10486/690842/CE_41_117_4.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cud:journl:v:41:y:2018:i:117:p:275-290

Access Statistics for this article

More articles in Cuadernos de Economía - Spanish Journal of Economics and Finance from Asociación Cuadernos de Economía
Bibliographic data for series maintained by Erick Tinsson ().