The dynamic linkages of fiscal and current account deficits: New evidence from five highly indebted European countries accounting for regime shifts and asymmetries

Emmanouil Trachanas and Constantinos Katrakilidis

Economic Modelling, 2013, vol. 31, issue C, 502-510

Abstract: This article provides new empirical evidence on the long-term relationship between the fiscal and current account imbalances, of five European economies under financial market pressure and insolvency; Portugal, Ireland, Italy, Greece and Spain. We attempt to re-evaluate the dynamic linkages between the twin-deficits allowing for the presence of structural breaks and asymmetries. The evidence is in favor of the “twin deficits hypothesis”. More insight is further provided through the magnitude and significance of the asymmetric linkages between the twin deficits in the long-run time horizon. Our findings indicate that fiscal deficit decreases have a greater impact on the current account deficit rather than the opposite.

Keywords: Fiscal deficit; Current account deficit; Twin deficits; Structural breaks; Asymmetric cointegration (search for similar items in EconPapers)
JEL-codes: C22 E62 F32 H62 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:31:y:2013:i:c:p:502-510

DOI: 10.1016/j.econmod.2012.12.026

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