Twin Deficits Research Articles

The twin deficit theory in a dynamic consistent stock-flow model for an open economy

RESUMO O presente trabalho desenvolve um modelo stock-flow consistent que incorpora explicitamente a teoria dos déficits gêmeos para, a seguir, analisar o impacto da política fiscal e da dinâmica da dívida pública em um modelo pós-keynesiano, verificando seus efeitos e limitações. Mesmo rejeitando vários pressupostos neoclássicos, a política fiscal possui limitação para estimular permanentemente o crescimento, pois, se ela não for compatível com o equilíbrio do balanço de pagamentos, o passivo externo líquido aumentará e se tornará insustentável. Por fim, essa hipótese é testada empiricamente e verifica-se que a dinâmica da política fiscal e da posição externa estão associadas quando especificadas de acordo com o exposto por Godley e Cripps (1983) e modificado por Pérez Caldentey (2007).

THE TWIN DEFICITS OR NEGATIVE REVERSE CAUSALITY? A NONLINEAR APPROACH TO THE TURKISH BUDGET AND CURRENT ACCOUNT BALANCES

The budget deficit causing an increase in the current account deficit is named twin deficits. In addition, the budget and current account balances represent the internal and external balance of the economy. As in many developed and developing countries, revealing the relationship between internal and external imbalances in the Turkish economy in terms of determining economic policies is very important. Most of the studies on twin deficits in the literature are based on analyzes with linear models. The aim of this study, unlike other studies in the literature, is to examine the relationship between the budget and current account balance in the Turkish economy with non-linear time series analysis. For this purpose, nonlinear unit root and cointegration tests were applied to the data covering the period 1994-2021. The findings show that the negative reverse causality hypothesis is valid instead of the twin deficits hypothesis in the Turkish economy in the analyzed period. Accordingly, there is a negative relationship from the current account balance to the budget balance in both the long and short run.

Current Account targeting hypothesis versus twin deficit hypothesis: the European Monetary Union experience of Portugal

In this article, we study the relationship between the government budget balance and the current account balance for Portugal, using quarterly data from 1999 to 2019. On the one hand, the causality tests find a unidirectional relation running from the current account balance to the government budget balance. On the other hand, estimations show a bi-directional relationship between these variables, and the existence of a bilateral relationship between the structural components of both balances. Even so, the policy implication is that the use of fiscal policy to correct the external imbalance, especially in an economic crisis, is not substantial, due to the small size of the estimated impact. In addition, with an ARDL model, we find a negative long run relationship between the share of public consumption on GDP and the current account balance. As expected, the variation of real public consumption produces an adverse accumulated response on the current account balance. Finally, the investment rate negatively affects the cyclical component of the current account balance and contributes to the structural improvement of the budget balance.

The role of fiscal policies for external imbalances: Evidence from the European Union

We revisit the relation between budget deficits and current account deficits for 28 European Union countries from 1996 to 2019. We find that an increase in budget deficit of 1 pp of GDP results in a deterioration of the current account deficit of 0.318 pp of GDP, which supports the Twin Deficits Hypothesis. On the other hand, dynamic panel estimates partially corroborate the Ricardian Equivalence Hypothesis in the presence of a fiscal rules index. In addition: i) the relation between the two deficits is asymmetric and the negative impact of the recent Eurozone banking and sovereign debt crisis on the current account balance is observed; ii) with right-wing governments, the impact of the budget balance on the current account balance is mitigated; if the government is on the left, the impact of the budget balance on the current account balance is amplified; iii) after 2010, the budget balance positively affects the current account balance; and iv) the positive impact of the budget balance on the current account balance is higher in the cases of non-Eurozone countries, high budget deficit countries, and low exports countries, whereas it is lower in the cases of Eurozone countries, low budget deficit countries, and high exports countries.

Relationship between the Twin Deficit Hypothesis and the Inflation: Case of Turkey (2010-2019)

Twin deficit hypothesis; It emerges when budget deficits and current account deficits are observed simultaneously. Exchange rate fluctuations have an impact on both cost inflation and consumer inflation through production costs due to Turkey's import substitution mode of production. In this study, the relationship between the twin deficit hypothesis and consumer inflation was analyzed using VAR analysis and Granger causality tests using quarterly data between the periods 2010: Q1 and 2019: Q4. According to the results obtained; while the twin deficit hypothesis was not supported in Turkey in the period discussed, it was observed that the budget deficit and current account deficit increased inflation.

Twin Deficit Challenge: An Evidence from Pakistan Economy

To investigate “Twin Deficit Challenge: An Evidence from Pakistan Economy” this study employed SAM 2010-11 for Pakistan (Dorosh, Niazi, and Nazli, 2015). This study used a static CGE model. The theoretical structure of the core model closely follows the Lofgren et al. (2001) model, with an extension to incorporate commonly observed specifications of a developing country (Naqvi 2011). The study concludes that the lag value of budget deficit and trade deficit are the main factors contributing to the twin deficit. Two experiments were conducted to check the effects. The experiments were conducted on Direct and Indirect tax to remove internal deficit in the economy. The study explored that the internal resources play a vital role in removing the twin deficit gap. The objective of this experiment was to determine the possibility of implementation of direct and indirect tax in the case of Pakistan and to analyze its benefits at the macro and household levels. The findings of the study recommend that budget deficits possess threats to fiscal policy. Results show that a policy mix of sales tax, income tax and government expenditure help to reduce income inequality while it reduces the financial dependency of the economy. Therefore, Pakistan should strive to reduce the budget deficit using a mix of macroeconomic policies.

Assessment, Interaction and the Transmission Process of Twin deficit Hypothesis: Fresh Evidence from India

In light of the persistent and coinciding internal and external imbalances, there remains an argument that worsening balance of payment (BoP) is the result of higher fiscal imbalance. However, no concrete consensus either theoretical or empirical exists, particularly in the context of India, and, therefore, this phenomenon of the twin deficit hypothesis becomes more of an empirical question. This study makes a timely and fresh revisit, especially in the backdrop of the fiscal expansions, to curb the recent recessionary situation that is engulfing the economy. To this end, an econometric exercise is undertaken on a quarterly data of financial year over 2000–2019. This work also extends the analysis with three reference variables, namely gross domestic product (GDP), private investment to GDP, real effective exchange rate together with the data for three dummy years to capture the impact of their specific occurrence in a particular year. The transmission mechanism describes how the budget deficit transcends and affects external sector variables. Empirical findings suggest a strong positive association between the budget deficit and current account deficit (CAD), which reinforces the validity of Mundell–Fleming and Keynesian theories. The effect of different exogenous variables explicitly indicates a simultaneous action on multiple fronts to improve the twin account balance.

A Test of the Twin Deficits Hypothesis for the Kenyan Economy

This study examines the Twin Deficit Hypothesis (TDH), which posits that a government’s fiscal deficit occurs together with current account deficit through demand, interest rate and real exchange rate effects. The Keynesian theory and Mundell–Fleming framework prove the existence of the twin deficit relation, whereas the Ricardian equivalence theory negates any such relationship. Empirically also, certain studies prove the existence of the twin deficit relation, whereas several others challenge and prove that the two deficits have no relation with each other. This study therefore sought to test the Twin Deficit Hypothesis within the Kenyan context. Data was obtained from the International Financial Statistics and the World Economic Outlook of the International Monetary Fund (IMF). The data spans the period 1980-2017. An ARDL model was implemented to test the validity of the hypothesis. ARDL was preferred given the short span of data and the model’s suitability for small samples. The findings indicate that budget deficits have direct positive effects on the current account. These effects are significant at 1% level of significance. The indirect effects of budget deficits on the current account are also strong. Budget deficits, interest rate and the exchange rate have significant effects on the current account. An increase in budget deficits increases interest rates and appreciates the exchange rate. This leads to deterioration of the current account. Thus the real exchange rate has highly significant effects on the current account. The conclusion is that budget deficits and the exchange rate dominate in explaining movements in the current account in the long run. The results support the Mundell-Fleming model and the twin deficit hypothesis. Keywords: Twin Deficit Hypothesis , Mundell-Fleming Model, Budget Deficit, Current Account DOI: 10.7176/JESD/13-4-06 Publication date: February 28 th 2022

Fiscal Consolidation, Social Sector Expenditures and Twin Deficit Hypothesis: Evidence from Emerging and Middle-Income Countries.

Following the present scale of fiscal imbalances, governments often implement fiscal consolidation programs to restore macroeconomic stability. This paper empirically explores the connections between social expenditure, current account and fiscal consolidations using the system-GMM estimator, on a panel of 23 emerging and middle-income countries for the 2009–2018 period. Our results confirm that government social expenditure decreases once fiscal austerity measures are implemented, practically when they are spending-driven. Fiscal consolidation may hurt important social expenditure allocation mainly on education and health components. Furthermore, we find that fiscal consolidation improves the current account deficit, providing support for the twin deficits hypothesis. These findings indicate that fiscal consolidation will eventually contribute to medium- and long-term external debt stability through the current account improvement. However, the exclusion of key growth determinants such as human capital can lead to many inefficiencies such as weak competition in the provision of social services (Jafarov and Gunnarsson in Government spending on health care and education in Croatia: Efficiency and reform options, working paper 136, International Monetary Fund, 2008). We suggest rationalizing social spending and devoting the country’s revenue to necessary and economically productive projects. The efficient use of resources will thus ensure better quality of education and health care services. This calls for good governance, an adequate administration and effective delivery structures.

Étude empirique des « déficits jumeaux » pour le cas du Sénégal

Cet article vise à vérifier l'hypothèse de neutralité ricardienne au Sénégal, à travers de l'existence ou non du phénomène des « déficits jumeaux ». L'objectif visé dans ce travail était d'étudier la corrélation entre le déficit budgétaire et le déficit du compte courant. La revue de la littérature théorique est axée sur les approches d'équivalence ricardienne et conventionnelle (classique et keynésienne) portant sur les effets de l'endettement public sur l'économie réelle. La revue de la littérature empirique a permis de revenir sur certaines applications par pays ou données de panel pour confirmer ou infirmer l'hypothèse de neutralité par une vérification de l'existence ou non du phénomène des déficits jumeaux. Ainsi, l'approche méthodologique adoptée est le test de cointégration des deux variables à travers l'utilisation du modèle à correction d'erreurs (MCE) suivant la méthode d'Engle et Granger (1987). Nos résultats indiquent une absence de cointégration entre les variables déficit budgétaire et solde du compte courant et donc de relation d'équilibre sur la période étudiée, entre ces deux variables, d'où une acceptation de la Proposition d'équivalence Ricardienne sur la période 1991-2020. Aussi, ce résultat s'identifie à la vérification de la Proposition d'Equivalence Ricardienne (PER) pour le Sénégal.

Twin Deficits Through the Looking Glass: Time-Varying Analysis in the Euro Area

Twin Deficits Through the Looking Glass: Time-Varying Analysis in the Euro Area

Глобальные дисбалансы: эволюция подходов

The article examines the current state and causes of global imbalances’ sustainability – the phenomenon whereby some major systemic countries run large and persistent current account deficits, which are mirrored by large surpluses in a number of other countries. The widening of global imbalances during COVID 19 pandemic contrasts with their dynamics during previous global downturns, when the scale of imbalances narrowed. The article analyzes various explanations of global imbalances: intertemporal choice with a difference in the rates of return, demographic changes, global savings glut, dynamics of oil prices, exchange rate manipulations, twin deficits, demand for safe assets. The significance of each of the causes of global imbalances changes over time, and currently fiscal policy has been playing an increasing role to determine the movements of current account deficits. The global fiscal response to the pandemic, especially in advanced economies, has been unprecedented, which led to significant reduction in government savings. The scale and dynamics of global imbalances are largely determined by the state of the US balance of payments: it is a reflection of the ability to generate safe assets and to finance trade and budget deficits cheaply by using the dollar’s status as the dominant world currency. There are differences in theoretical approaches regarding the macroeconomic effects of global imbalances. But persistent current account deficits and surpluses lead to accumulation of stock imbalances – the difference between countries’ foreign assets and liabilities. The ongoing negative changes in the net international investment positions of many leading advanced economies indicate an increase in external indebtedness. This creates risks to both debtor and creditor countries and threatens the stability of the global financial system.

Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies

Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies

THE STRUCTURAL RELATIONSHIP BETWEEN FISCAL DEFICIT AND CURRENT ACCOUNT DEFICIT IN INDIA: SVAR ESTIMATION OF THE TWIN DEFICIT HYPOTHESIS

This paper tests the validity of the twin deficit hypothesis, the causal relationship between fiscal deficit (FD) and current account balance (CAB), in India for the period 1994-2016 by estimating a structural model that includes the interest rate and exchange rate as an interlinking variable. The SVAR estimates show a negative effect implying that a positive shock given to FD worsens the CAB. The current account deficit, while not directly determined by fiscal deficit, is significantly influenced by RIR and REER. The IRF indicates that a positive shock to FD leads to an increase in the domestic interest rate which appreciates the real exchange rate of the domestic currency making the exports costlier and imports cheaper and thereby widening the current account deficit. The SVAR, IRF and Granger causality analyses show that fiscal deficit affects the current account balance in India through the interlinking variables RIR and REER for the time period 1994 (quarter-I) to 2016 (quarter-IV). This result validates the relevance of the twin deficit hypothesis in the Indian economy and is consistent with the Keynesian proposition in the Indian economy during the study period.

Determinants of Current Account Deficits in Sierra Leone: The Bound Testing Approach

This paper investigates the determinants of current account deficit in Sierra Leone, within the framework of the Auto Regressive Distributed Lag (ARDL) bound testing approach with annual time series data from 1980 to 2020. The unit root results reveal that the variables constitute both I(0) and I(1) series, while the bound test confirms the existence of cointegration. The results confirm that budget deficit, external debt and real exchange rate are the main drivers of current account deficit in the long run. Intuitively, the result reveals that budget deficit is positively associated with current account deficit, which confirms the validity of the twin deficit hypothesis. The result also suggests a positive relationship between external debt and current account deficit, denoting that the accumulation of debt leads to a worsening of the current account deficit. The findings also indicate a positive relationship between real exchange rate and current account deficit. This result is consistent with the Mundell-Flemming model, which predicts that an appreciation in the real exchange rate can adversely affect a country’s competitiveness position, leading to a worsening of the current account deficit. The short run result indicates that any disequilibrium in the model is corrected at the 65% adjustment speed annually. Also, the finding shows that, the coefficient of lagged current account deficit and budget deficit are the main determinants of current account deficit. The diagnostic result suggests that the explanatory variables account for 73% of the variations in current account deficit. Thus, the government should broaden the tax base and reinforce the implementation of an efficient tax administration system that could tackle tax evasion and tax avoidance, in order to enhance domestic revenue mobilization.

Modeling twin deficit hypothesis with oil price volatility in African oil-producing countries

The study examines the dynamic connection between fiscal and current account deficits conditioned on oil price fluctuation in selected African oil-producing countries. Annual data for twelve African oil-producing countries for the period 1981–2018 are used. Using the Dynamic Fixed Effect and the Augmented Mean Group techniques due to cross-sectional dependence, results validate the twin deficits hypothesis for the selected African oil-producing countries. Panel data granger causality result also supports a bidirectional connection between the fiscal and the current account deficits. Thus, structural reforms are needed to spur national savings and diversify the export sectors of these countries. It is also imperative that positive oil price shocks are not assumed to be permanent shocks so as to smoothen consumption and implement a robust fiscal rule and framework for managing excess crude oil prices for stabilization.

Relationship between Twin Deficit and Growth in the COVID-19 Process: An Empirical Study on the Turkish Economy

Amaç: Çalışmada, günümüz dünyasını ve yaşamın her yönünü olumsuz etkileyen COVID-19 pandemisi süreci içerisinde Türkiye ekonomisinde gözlemlenen bütçe açığı ve cari açığın ekonomik büyüme üzerindeki etkisini belirlemek amaçlanmıştır.
 Tasarım/Yöntem: Bütçe açığında ve cari açıkta gözlemlenen şoklarının ekonomik büyüme üzerinde yarattığı etki, Etki-Tepki analizi ve bu etkinin yüzdesel olarak açıklaması ise Varyans Ayrıştırma analizi ile tespit edilmiştir.
 Bulgular: Analiz sonuçlarına göre cari açık ve bütçe açığında görülen şokların büyüme üzerindeki etkisi pozitif olmakla beraber bu şokların etkisi çok düşük derecededir ve büyümede meydan gelen bir standart sapmalık şok en fazla bütçe açıklarından kaynaklanmıştır. Ayrıca bütçe açıklarında gözlemlenen bir şoka cari açığın verdiği tepki ilk dönemlerde pozitifken, son dönemlerde negatif olmuştur. Bu durum bütçe açıklarında gözlemlenen açıkların cari açığı tetiklediğine dayanan İkiz Açık Hipotezinin, araştırılan dönemlerde geçerli olduğunu göstermektedir.
 Sınırlılıklar: Araştırma, Türkiye ekonomisi ve 2018-M1:2021-M1 zaman aralığının kullanılması ile sınırlandırılmıştır.
 Özgünlük/Değer: Günümüzde hala etkisini göstermekte olan COVID-19 pandemisi sürecinde ikiz açık sorununun Türkiye ekonomisi üzerindeki etkisini belirlemek, mevcut durum için politika önerileri ve sorunların yorumlanması bakımından önemlidir. Ayrıca bu çalışma ile pandemi sürecinde Türkiye ekonomisi için yapılan araştırmalara bir katkı sağlanacağı ve fikir birliği doğrultusunda uygun politika çıkarımlarının yapılabileceği düşünülmektedir.

Asymmetric Effect of Fiscal Deficit on Current Account Deficit: Evidence from India

This study has attempted to re-investigate the impact of fiscal deficit (FD) on current account deficit (CAD) (also known as twin deficit hypothesis) in India from 1970–1971 to 2018–2019 in the presence of private saving–investment gap (SI) and exchange rate (EXR). For the empirical investigation, the study has employed the nonlinear autoregressive distributed lag (NARDL) approach to cointegration. The NARDL results found the evidence of an asymmetric effect of FD, SI and EXR on CAD in the long run only. The obtained results support the traditional views of the Keynesian approach that FD has a positive impact on CAD, validates the existence of the ‘Twin Deficit Hypothesis’ in India. Further, results also depict that SI has a positive effect on CAD, whereas EXR has an adverse impact on CAD. From a policy standpoint, the asymmetric impact of FD on CAD provides strong reasons for conceiving policies that are adaptable to changing dynamics in internal as well as external sectors.

Validity of Twin Deficit and Triplet Deficit Hypothesis in The Relation of Current Account Deficit - Budget Deficit and Interest Rate: 1990-2019 Case of Turkey

Bu çalışmada 1990-2019 dönemi için Türkiye’de net tasarruf oranı ve faiz oranları kapsamında ‘ikiz açık’ ve ‘üçüz açık’ hipotezlerinin geçerliliği Bayer-Hanck (2012) eşbütünleşme testi ve Hacker-Hatemi J (2006) nedensellik testi ile analiz edilmektedir. Hacker ve Hatemi-J (2006) nedensellik analizi bulgularına göre, bütçe açığından cari açığa, bütçe açığından faiz oranına, faiz oranından cari açığa ve faiz oranından tasarruf oranına doğru tek yönlü nedensellik ilişkisi olduğu sonucuna ulaşılmıştır. Türkiye için incelenen dönem için, ‘İkiz Açık’ hipotezinin geçerliliği kabul edilmekte ancak üçüz açık hipotezinin geçerli olmadığı sonucuna ulaşılmıştır.

The upsurge of trade protectionism in sub-Saharan Africa since the 2008 crisis: Is the twin deficit guilty?

Despite the growing literature on the political economy of trade protectionism, little is known about the effect of twin deficit on trade restrictions in general around the world and particularly in sub-Saharan Africa (SSA). The aim of this study is to fill this gap by assessing how twin deficit affects trade restrictions in SSA. We used a panel of 16 countries which recorded simultaneously and successively the current account deficit and the budget deficit during the period 2008–2018. The empirical evidence is based on the system Generalized Method of Moment (GMM). Our results show that the twin deficit is responsible for the upsurge of trade protectionism in sub-Saharan Africa.