Are the twin or triple deficits hypotheses applicable to post-communist countries?

Hüseyin Şen,Ayşe Kaya

doi:10.2298/pan170721028s

Hüseyin Şen, Ayşe Kaya

Open Access

https://doi.org/10.2298/pan170721028s

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Abstract

This study examines the validity of the twin or triple deficits hypotheses using bootstrap panel Granger causality analysis and an annual panel dataset of six post-communist countries (Russia, Poland, Ukraine, Romania, the Czech Republic, and Hungary) during the period from 1994 to 2015. The results corroborate neither the validity of the twin deficits hypothesis nor its extended version, the triple deficits hypothesis, for any of the sample countries. In other words, we find no Granger causal relationship between budget deficits and external (trade or current account) deficits or among budget deficits, private savings-investment deficits, and external deficits in the countries examined. On the basis of these results, we reject the Keynesian view of the twin or triple deficits hypotheses. Rather, we confirm the Ricardian view.

Highlights

Despite a large number of empirical studies attempting to capture the link between fiscal deficits and trade or current account deficits regardless of the types of economies – developed, developing, or transitioning – the results provide inconclusive evidence
If a cross-sectional dependency does exist, the use of the SUR approach could be more efficient than an ordinary leastsquares (OLS) approach in estimating panel data causality
The causality results obtained from the SUR estimator developed by Arnold Zellner (1962) should be more reliable than those obtained from country-specific OLS estimations

Summary

Macroeconomic Backgrounds of Six Post-Communist Countries

In the aftermath of the collapse of the Soviet Union, a number of formerly socialist countries embarked on a long and painful transition process of becoming market-based economies similar to their Western counterparts. The transition period was characterized in particular by two things: widespread corruption and poor property rights discouraging investors from investing in these countries These issues still pose a problem especially for those sample countries that are non-EU members: namely Russia and Ukraine. Thanks to EU membership, improvements in the budget and current account balance, especially in new member countries – four out of the six sample countries – helped, to some extent, in mitigating the negative impact of external monetary policies on capital inflows. In the nature of things, the internal and external balances of the sample countries have been affected by these developments in some ways, but to different degrees

Theoretical Framework

Review of the Empirical Literature

Data and Methodology

Methodology

Empirical Results

Closing Remarks