Global aspects of the twin deficit hypothesis
Abstract
The twin deficit hypothesis, which explores the causal link between the budget deficit and the current account deficit, is put to the test for a sample of 188 countries for the period 1980-2014. The obtained results show that there is a complex impact on the current account dynamics, which cannot be explained solely by the dynamics of a single variable, or, if it is possible, then this variable is not the budget balance. It is found that the average budget balance is positive in only 36 countries (it is negative in the remaining 152 countries), ergo, the twin deficit hypothesis is confirmed. This is also supported by the VAR analysis - the double deficit hypothesis is valid for all groups of coefficients except those of Tuvalu, Lebanon, Eritrea and Equatorial Guinea, which have extreme coefficients (above -10).
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References
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