Causality between external balance and (some) fiscal variables: Preliminary results for the Eurozone

Abstract

In this article, we present preliminary results, analyzing the causality between external balance and fiscal variables (primary public balance, interest paid on debt and overall public balance) within the so-called twin deficits hypothesis for a set of six Eurozone countries – three core countries (Austria, Finland and Germany) and three peripheral countries (Greece, Portugal and Spain) – in the period 1960–2011. We implement the Toda and Yamamoto (1995) approach to Granger non-causality testing (Granger, 1969). Results are not homogeneous for all the Eurozone countries included in the sample. Evidence of causality according to twin deficits hypothesis is provided for the cases of Austria and Spain, while reverse causality was found in the case of Germany.