Testing Twin Deficits Hypothesis for Eu-27 and Turkey: A Panel Granger Causality Approach under Cross-sectional Dependence

Mehmet Bölükbaş (), Mehmet Hanefi Topal () and Hakan Hotunluoğlu ()
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Mehmet Bölükbaş: Department of Economics, Aydin Adnan Menderes University, Turkey.
Mehmet Hanefi Topal: Department of Public Finance, Gümüşhane University, Turkey.
Hakan Hotunluoğlu: Department of Public Finance, Aydin Adnan Menderes University, Turkey.

Journal for Economic Forecasting, 2018, issue 4, 101-119

Abstract: Twin deficits hypothesis has been one of the most widely-applied phenomenon in the economics literature. In this study, the twin deficits hypothesis was tested for the EU-27 member states and Turkey with the data covering the 2002:Q1-2014:Q1 period. Unlike other studies, the twin deficits hypothesis was tested by using second generation panel causality tests that considered the cross-sectional dependence. According to the findings of this study, which used panel Granger causality tests suggested by Dumitrescu-Hurlin (2012) and Emirmahmutoğlu-Kose (2011), there is statistically significant bidirectional causality between budget deficit (BD) and current account deficit (CAD) in the relevant period. It was found out a bidirectional causality between BD and CAD in sixteen of the twenty-eight countries (Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Italy, Netherlands, Romania, Spain, Turkey and the UK) and a unidirectional causality from BD to CAD was also noticed in five EU countries (Cyprus, Latvia, Lithuania, Poland and Slovakia). Nevertheless, the findings indicated that there is a unidirectional causality from CAD to BD in Hungary, Luxembourg and Malta but there is no causality between BD and CAD in Ireland, Portugal, Slovenia, and Sweden.

Keywords: budget deficit; current account deficit; twin deficits hypothesis; cross-sectional dependence; panel Granger causality (search for similar items in EconPapers)
JEL-codes: C33 F32 H62 O52 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:rjr:romjef:v::y:2018:i:4:p:101-119

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