Empirical Analyses of the Relationship between Trade and Budget Deficit of FYR of Macedonia

Abstract

The purpose of this article is to analyze the evidence of twin deficits hypothesis by empirically examining the relationship between trade deficit and budget deficit for the case of FYR of Macedonia. The study employs a vector autoregression (VAR) model as well as a Granger causality test in order to investigate the causal relationship between trade and budget deficit variables using quarterly data for the time period 1998Q1–2017Q4. The econometric results of VAR model disclose that there exists a short term relationship between these two variables, implying that higher trade deficits are associated with higher fiscal deficits. Moreover, the causality test shows a unidirectional relationship, revealing that trade deficit causes budget deficit, whereas budget deficit doesn't cause trade deficit.
 
 
 Keywords: trade deficit, budget deficit, causality analysis