[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-12-00048.html
   My bibliography  Save this article

Fiscal Policy, Consumption and Current Account in the European Countries

Author

Listed:
  • Cosimo Magazzino

    (Roma Tre University)

Abstract
This paper explores the relationship between fiscal deficit, trade deficit and private consumption in European countries in the years 1970-2010. The aim of the study is to test empirically the validity and rationale of the Keynesian proposition (conventional view or Twin Deficits hypothesis) and the Ricardian Equivalence hypothesis, as well as to analyze the relationship between fiscal policy and private consumption. The empirical findings of our study show mixed results. In fact, static panel data estimates suggest that a one per cent increase in fiscal deficit/GDP ratio tends to deteriorate the current account/GDP ratio of 0.21 per cent, although it increases the private consumption of 0.21 per cent. Furthermore, the dynamic estimates largely depend on the estimator chosen, since the GMM-Dif estimates show a significant effect of fiscal deficit both on trade balance and on private consumption, in line with TD hypothesis; on the contrary, GMM-Sys estimator suggests that these effects are irrelevant, supporting RE hy-pothesis. With regard to the former estimates, we observed that each euro rise in fiscal deficit is associated, on average, with a 22 cents decline in the current account, while the estimated rise in private consumption is smaller (11 cents). Finally, Granger causality tests show mixed results.

Suggested Citation

  • Cosimo Magazzino, 2012. "Fiscal Policy, Consumption and Current Account in the European Countries," Economics Bulletin, AccessEcon, vol. 32(2), pages 1330-1344.
    • Handle: RePEc:ebl:ecbull:eb-12-00048
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I2-P127.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chul-Hwan Kim & Donggeun Kim, 2006. "Does Korea have twin deficits?," Applied Economics Letters, Taylor & Francis Journals, vol. 13(10), pages 675-680.
    2. Feldstein, Martin & Elmendorf, Douglas W, 1990. "Government Debt, Government Spending, and Private Sector Behavior Revisited: Comment," American Economic Review, American Economic Association, vol. 80(3), pages 589-599, June.
    3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    4. Ahmad Zubaidi Baharumshah & Evan Lau, 2009. "Structural breaks and the twin deficits hypothesis: Evidence from East Asian countries," Economics Bulletin, AccessEcon, vol. 29(4), pages 2517-2524.
    5. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-381, August.
    6. Duane Rockerbie, 1997. "Are consumers Ricardian when some are liquidity constrained? Evidence for the United States," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 821-827.
    7. repec:ebl:ecbull:v:5:y:2008:i:16:p:1-14 is not listed on IDEAS
    8. Becker, Torbjorn, 1997. "An investigation of Ricardian equivalence in a common trends model," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 405-431, August.
    9. António Afonso, 2008. "Euler testing Ricardo and Barro in the EU," Economics Bulletin, AccessEcon, vol. 5(16), pages 1-14.
    10. Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993. "Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 580-594, October.
    11. Vansteenkiste, Isabel & Nickel, Christiane, 2008. "Fiscal policies, the current account and Ricardian equivalence," Working Paper Series 935, European Central Bank.
    12. Vince Daly & Jalal Siddiki, 2009. "The twin deficits in OECD countries: cointegration analysis with regime shifts," Applied Economics Letters, Taylor & Francis Journals, vol. 16(11), pages 1155-1164.
    13. Gerhard Reitschuler & Jesús Crespo Cuaresma, 2004. "Ricardian Equivalence Revisited: Evidence from OECD countries," Economics Bulletin, AccessEcon, vol. 5(16), pages 1-10.
    14. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(1), pages 230-231, January.
    15. HARJIT K. Arora & PAMI Dua, 1993. "Budget Deficits, Domestic Investment, And Trade Deficits," Contemporary Economic Policy, Western Economic Association International, vol. 11(1), pages 29-44, January.
    16. Matthew Higgins & Thomas Klitgaard, 1998. "Viewing the current account deficit as a capital inflow," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 4(Dec).
    17. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(4), pages 876-878, October.
    18. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
    19. Anoruo, Emmanuel & Ramchander, Sanjay, 1998. "Current account and fiscal deficits: Evidence from five developing economies of Asia," Journal of Asian Economics, Elsevier, vol. 9(3), pages 487-501.
    20. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
    21. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    22. Normandin, Michel, 1999. "Budget deficit persistence and the twin deficits hypothesis," Journal of International Economics, Elsevier, vol. 49(1), pages 171-193, October.
    23. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    24. Carlos Fonseca Marinheiro, "undated". "Ricardian Equivalence: An Empirical Application to the Portuguese Economy," International Economics Working Papers Series ces0112, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
    25. Hassan Mohammadi, 2004. "Budget deficits and the current account balance: New evidence from panel data," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 28(1), pages 39-45, March.
    26. Ashok Parikh & Bill Rao, 2006. "“Do Fiscal Deficits Influence Current Accounts? A Case Study of India”," Review of Development Economics, Wiley Blackwell, vol. 10(3), pages 492-505, August.
    27. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    28. Kostas Drakos, 2001. "Testing the Ricardian Equivalence Theorem: Time Series Evidence from Greece," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 149-160, June.
    29. Stephen M. Miller & Frank S. Russek, 1989. "Are The Twin Deficits Really Related?," Contemporary Economic Policy, Western Economic Association International, vol. 7(4), pages 91-115, October.
    30. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    31. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-338, April.
    32. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
    33. repec:ebl:ecbull:v:5:y:2004:i:16:p:1-10 is not listed on IDEAS
    34. Aristovnik, Aleksander & Djurić, Sandra, 2010. "Twin deficits and the Feldstein-Horioka puzzle: a comparison of the EU member states and candidate countries," MPRA Paper 24149, University Library of Munich, Germany.
    35. Artatrana Ratha, 2010. "Twin Deficits or Distant Cousins? Evidence from India," Working Papers 2010-5 Classification- F , Saint Cloud State University, Department of Economics.
    36. Khalid, Ahmed M., 1996. "Ricardian equivalence: Empirical evidence from developing economies," Journal of Development Economics, Elsevier, vol. 51(2), pages 413-432, December.
    37. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(3), pages 619-631, July.
    38. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
    39. Festus Egwaikhide, 1999. "Effects of Budget Deficit on Trade Balance in Nigeria: A Simulation Exercise," African Development Review, African Development Bank, vol. 11(2), pages 265-289.
    40. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
    41. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    42. Agustin Garcia & Julian Ramajo, 2004. "Budget deficit and interest rates: empirical evidence for Spain," Applied Economics Letters, Taylor & Francis Journals, vol. 11(11), pages 715-718.
    43. Ahmed M. Khalid & Teo Wee Guan, 1999. "Causality tests of budget and current account deficits: Cross-country comparisons," Empirical Economics, Springer, vol. 24(3), pages 389-402.
    44. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    45. Francesco Forte & Cosimo Magazzino, 2011. "Optimal Size Government and Economic Growth in EU Countries," Economia politica, Società editrice il Mulino, issue 3, pages 295-322.
    46. Tomas Wroblowsky, 2007. "Explaining the Variability of Debt Neutrality Tests Results: A Meta-Analysis of Ricardian Equivalence," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 5(1), pages 7-24.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cosimo Magazzino, 2022. "Fiscal sustainability in the GCC countries," International Journal of Economic Policy Studies, Springer, vol. 16(2), pages 389-408, August.
    2. Algieri, Bernardina, 2013. "An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries," Economic Systems, Elsevier, vol. 37(2), pages 233-253.
    3. Bernardin Senadza & Godson Korbla Aloryito, 2016. "The twin deficits hypothesis: Evidence from Ghana," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 9(3), pages 55-62, December.
    4. Ekkehart Schlicht, 2013. "Unexpected Consequences of Ricardian Expectations," Metroeconomica, Wiley Blackwell, vol. 64(3), pages 498-512, July.
    5. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.
    6. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    7. Mehmet BÖLÜKBAŞ & Mehmet Hanefi TOPAL & Hakan HOTUNLUOĞLU, 2018. "Testing Twin Deficits Hypothesis for Eu-27 and Turkey : A Panel Granger Causality Approach under Cross-sectional Dependence," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 101-119, December.
    8. Mumtaz, Kinza & Munir, Kashif, 2016. "Dynamics of Twin Deficits in South Asian Countries," MPRA Paper 74592, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    2. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.
    3. Afonso, António & Coelho, José Carlos, 2022. "The role of fiscal policies for external imbalances: Evidence from the European Union," Economic Systems, Elsevier, vol. 46(2).
    4. Manamba Epaphra, 0. "The Twin Deficits Hypothesis: An Empirical Analysis for Tanzania," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(65), pages 2-34, September.
    5. Hany Eldemerdash & Hugh Metcalf & Sara Maioli, 2014. "Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective," Empirical Economics, Springer, vol. 47(3), pages 825-851, November.
    6. Piotr Bartkiewicz, 2020. "Quantitative Easing: New Normal or Emergency Measure?," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.
    7. Nurudeen Abu & Awadh Ahmed Mohammed Gamal, 2020. "An Empirical Investigation of the Twin Deficits Hypothesis in Nigeria: Evidence from Cointegration Techniques," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.
    8. Konstantinos P. Panousis & Minoas Koukouritakis, 2020. "Twin Deficits: Evidence From Portugal, Italy, Spain and Greece," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(5), pages 332-338, September.
    9. José Carlos Coelho, 2020. "The relationship between budget deficit and external deficit: the case of Portugal," Working Papers REM 2020/0116, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    10. S M Ali Abbas & Jacques Bouhga-Hagbe & Antonio Fatás & Paolo Mauro & Ricardo C Velloso, 2011. "Fiscal Policy and the Current Account," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 603-629, November.
    11. Al-Jahwari, Salim Ahmed Said, 2021. "Does the Twin-Deficits doctrine apply to the Gulf Cooperation Council? A dynamic panel VAR-X model approach," MPRA Paper 111232, University Library of Munich, Germany.
    12. Şen, Hüseyin & Kaya, Ayşe, 2016. "Are the twin or triple deficits hypotheses applicable to post-communist countries?," BOFIT Discussion Papers 3/2016, Bank of Finland Institute for Emerging Economies (BOFIT).
    13. International Monetary Fund, 2010. "Fiscal Policy and the Current Account," IMF Working Papers 2010/121, International Monetary Fund.
    14. Bilman, Mustafa Erhan & Karaoğlan, Sadık, 2020. "Does the twin deficit hypothesis hold in the OECD countries under different real interest rate regimes?," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 205-215.
    15. Eregha, Perekunah B. & Aworinde, Olalekan B. & Vo, Xuan Vinh, 2022. "Modeling twin deficit hypothesis with oil price volatility in African oil-producing countries," Resources Policy, Elsevier, vol. 75(C).
    16. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-11.
    17. António Afonso & José Carlos Coelho, 2021. "60%, -4% And 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments," EconPol Working Paper 69, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    18. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 1-16.
    19. Tosun, M. Umur & Iyidogan, Pelin Varol & Telatar, Erdinç, 2014. "The Twin Deficits in Selected Central and Eastern European Economies: Bounds Testing Approach with Causality Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 141-160, June.
    20. Algieri, Bernardina, 2013. "An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries," Economic Systems, Elsevier, vol. 37(2), pages 233-253.

    More about this item

    Keywords

    Fiscal Policy; Ricardian Equivalence; Twin Deficits; Panel;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H6 - Public Economics - - National Budget, Deficit, and Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-12-00048. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.