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The relationship between budget deficit and external deficit: the case of Portugal

José Carlos Coelho ()

No 2020/0116, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper makes an empirical analysis applied to Portugal between 1999 and 2016 which investigates the existence of a causal relationship between the budget balance (overall and primary) and the external balance (goods and services and current). Using Granger Causality Test (1969) and the Toda-Yamamoto Methodology (1995), we conclude that there is causality between the overall budget balance and the current external balance and between the primary budget balance and the current external balance, which provides support to the Twin Deficits Hypothesis. We also found some evidence to verify the Current Account Targeting Hypothesis, which points to the possibility of bi-directional causality between the budget deficit and the external deficit in Portugal.

Keywords: budget deficit; external deficit; Portugal; Granger Causality Test (1969); Toda-Yamamoto Methodology (1995) (search for similar items in EconPapers)
JEL-codes: C22 F32 F41 H62 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp01162020

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