ANALYSIS OF TWIN DEFICIT PROBLEM AND FELDSTEIN-HORIOKA HYPOTHESIS: AN EMPIRICAL INVESTIGATION FOR OECD COUNTRIES

Year 2020, , 494 - 512, 13.10.2020

Naib Alakbarov , Mahmut Ünsal Şaşmaz

https://doi.org/10.17130/ijmeb.798477

Cited By: 2

Abstract

The twin deficit hypothesis suggests that there is a relationship between the budget deficit and the
current account deficit. The traditional Keynesian Approach emphasizes that budget deficits resulted in
the current account deficit. On the other hand, the Ricardian Equivalence Approach argues that there is
no relationship between budget deficits and current account deficit. In this study, the validity of the twin
deficit hypothesis and Feldstein Horioka (1980) hypothesis is analyzed using both the Breaking Periods
of the Westerlund-Edgerton Breaking Cointegration Test (2008) and the Dumitrescu & Hurlin (2012)
Panel Causality Test. According to the cointegration and causality analyzes, it is concluded that there
is a long-term relationship between budget deficits and current account deficits. This result supports the
Traditional Keynesian Approach. Furthermore, it is seen that there is a two-way relationship between
budget deficits and current account deficits. Long term coefficients were obtained by using the AMG test.
When the panel coefficient results are considered, it is seen that the twin deficit hypothesis is valid, but
the results are obtained contrary to the analysis found by Feldstein Horioka (1980). However, when the
individual countries are examined, it is seen that the twin deficit hypothesis applies to some countries, and
the twin divergence hypothesis applies to some other countries. Besides, it is understood that the study
results do not support the Feldstein-Horioka (1980) hypothesis.

Keywords

Twin Deficit Hypothesis, Feldstein Horioka Hypothesis, Budget Deficits, Dumitrescu and Hurlin Panel Causality Test, Westerlund-Edgerton Breaking Cointegration Test

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