Does economic cycle ingluence twin deficits in Europe? A threshold model.
ČlánekOtevřený přístuppeer-reviewedpublishedDatum publikování
2018
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Univerzita Pardubice
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The aim of the paper is to test the impact of output gap on twin deficits
existence in euro-area countries and three non-euro area countries (Sweden, Denmark
and United Kingdom) over the time 1995 – 2015. The idea is motivated by the fact that
certain European countries succeeded to adjust their current account deficits during
recession and a principal motor of this adjustment was a decrease in their domestic
demand. A panel data threshold model estimated two thresholds of output gap and
divided the relation between budget balance and current account into three intervals. If
an output gap is slightly negative or positive, the model confirms twin deficits, whereby
a “twin relation” is stronger if an output is above its potential level. If an output is
importantly below its potential level during recession, we conclude to twin divergence
(e.g. in Greece, Portugal and Spain): even though a country increases its budget deficit
during recession, it can succeed to adjust its current account deficit. We recommend
taking into account an output gap when testing twin deficits as neglecting this effect
could potentially lead to spurious rejection of twin deficit hypothesis.
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1211-555X (Print)
1804-8048 (Online)
1804-8048 (Online)
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Scientific papers of the University of Pardubice. Series D, Faculty of Economics and Administration. 42/2018
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twin deficits, twin divergence, output gap, current account, budget balance, threshold model