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Twin deficits and fiscal spillovers in the EMU's periphery. A Keynesian perspective

Isabelle Gaysset, Thomas Lagoarde-Segot and Simon Neaime ()

Economic Modelling, 2019, vol. 76, issue C, 101-116

Abstract: The objective of this paper is to shed light on the twin deficit hypothesis in Southern Europe and the MENA region, taking into account fiscal spillovers from the core during the global crisis. Using Godley and Lavoie (2007)'s baseline model, we first show that fiscal shocks from a core region could aggravate macroeconomic imbalances in the periphery. We then gather data from the period 1977–2016 for ten MENA and peripheral EMU countries, and model the twin deficit hypothesis in the presence of fiscal spillover with a P-VARX methodology. Our results highlight that fiscal balance, current account, and GDP growth rates in the EMU's periphery are negatively affected by fiscal consolidations in the core. Fiscal discipline in surplus countries is tantamount to a ‘beggar thy neighbor’ effect on the periphery, in times of crisis. We discuss the implications of our results to propose further international coordination of macroeconomic policies.

Keywords: Twin deficit hypothesis; PVAR modelling; Macroeconomic policy (search for similar items in EconPapers)
JEL-codes: F65 G18 G28 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.econmod.2018.07.023

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