Prague Economic Papers 2016, 25(3):271-286 | DOI: 10.18267/j.pep.565

Current Account Deficit, Budget Deficit and Savings Gap: Is the Twin or Triplet Deficit Hypothesis Valid in G7 Countries?

Yusuf Ekrem Akbaº1, Fuat Lebe2
1 Department of Economics, Adıyaman University, Adıyaman, Turkey (akbasyea@gmail.com, akbasyusuf@yahoo.com).
2 Department of Economics, Adıyaman University, Adıyaman, Turkey (flebe@adiyaman.edu.tr).

The purpose of this study is to determine the validity of the triplet deficit hypothesis, which means the savings gap and budget deficit effect on the current account deficit. The empirical model is estimated for the G7 countries during the period between 1994 and 2011. The findings show that budget deficit and savings gap have important role in current account deficit in terms of estimator results. Moreover, bi-directional causality between the current account deficit and the savings gap and between the budget deficit and the savings gap are determined. So, especially the savings gap has an important effect on the current account deficit and the budget deficit. That is, triplet deficit hypothesis is valid in G7. Moreover, traditional approach is also valid since the causality is found between the current account deficit and budget deficit. Thereby, the authors conclude that the choice of statistical tools in analysing the nature of relationship among the current account deficit, the budget deficit, and the savings gap may play a key role for policy makers.

Keywords: triplet deficit hypothesis, savings gap, panel dynamic SUR, current account deficit, budget deficit
JEL classification: C33, F32, F41, H62, O16

Published: January 1, 2016  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Akbaº, Y.E., & Lebe, F. (2016). Current Account Deficit, Budget Deficit and Savings Gap: Is the Twin or Triplet Deficit Hypothesis Valid in G7 Countries? Prague Economic Papers25(3), 271-286. doi: 10.18267/j.pep.565
Download citation

References

  1. Akbaº, Y. E., Lebe, F., Zeren, F. (2014), "Testing the Validity of the Triplet Deficit Hypothesis for Turkey: Asymmetric Causality Analysis." Journal of Business and Economics, Vol. 7, pp. 137-154. Go to original source...
  2. Akbaº, Y. E., Senturk, M., Sancar, C. (2013), "Testing for Causality between the Foreign Direct Investment, Current Account Deficit, GDP and Total Credit: Evidence from G7." Panoeconomicus, Vol. 60, No. 6, pp. 791-812, http://dx.doi.org/10.2298/PAN1306791A Go to original source...
  3. Algieri, B. (2013), "An Empirical Analysis of the Nexus between External Balance and Government Budget Balance: The Case of the GIIPS Countries." Economic Systems, Vol. 37, No. 2, pp. 233-53, http://dx.doi.org/10.1016/j.ecosys.2012.11.002 Go to original source...
  4. Altintaº, H., Taban, S. (2011), "Twin Deficit Problem and Feldstein-Horioka Hypothesis in Turkey: ARDL Bound Testing Approach and Investigation of Causality." International Research Journal of Finance and Economics, Vol. 74, pp. 30-45.
  5. Bai, J., Kao, C. (2006), "Chapter 1 On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence." Contributions to Economic Analysis, Vol. 274, pp. 3-30. Go to original source...
  6. Barro, R. J. (1989), "The Ricardian Approach to Budget Deficits." The Journal of Economic Perspectives, Vol. 3, No. 2, pp. 37-54, http://dx.doi.org/10.1257/jep.3.2.37 Go to original source...
  7. Breusch, T., Pagan, A. (1980), "The Lagrange Multiplier Test and Its' Application to Model Specifications in Econometrics." Reviews of Economics Studies, Vol. 47, pp. 239-53. Go to original source...
  8. Chihi, F., Normandin, M. (2013), "External and Budget Deficits in Some Developing Countries." Journal of International Money and Finance, Vol. 32, pp. 77-98, http://dx.doi.org/10.1016/j.jimonfin.2012.03.002 Go to original source...
  9. Constantine, C. (2014), "Rethinking the Twin Deficits." Munich Personal RePEc Archive.
  10. Cooper, R. N. (2001), "Is the U.S. Current Account Deficit Sustainable? Will It Be Sustained?" Brookings Papers on Economic Activity, Vol. 1, No. 1, pp. 217-226, http://dx.doi.org/10.1353/eca.2001.0002 Go to original source...
  11. Elwell, C. K. (2007), "The U.S. Trade Deficit: Causes, Consequences and Cures." CRS Report for Congress.
  12. Elwell, C. K. (2010), "The U.S. Trade Deficit: Causes, Consequences and Policy Options." CRS Report for Congress.
  13. Feldstein, M. (2008), "Resolving the Global Imbalance: the Dollar and the U.S. Saving Rate." Journal of Economic Perspectives American Economic Association, Vol. 22, No. 3, pp. 113-25, http://dx.doi.org/10.1257/jep.22.3.113 Go to original source...
  14. Froyen, R. T. (1999), Macro Economics Theories and Policies, 6th Ed. New Gesrey: Prentice Hall Inc.
  15. Gale, W. G., Orszag, P. R. (2003), "Economic Effects of Sustained Budget Deficits." National Tax Journal, Vol. 56, No. 3, pp. 463-485, http://dx.doi.org/10.17310/ntj.2003.3.02 Go to original source...
  16. Holmes, M. J. (2011), "Threshold Cointegration and the Short-Run Dynamics of Twin Deficit Behaviour." Research in Economics, Vol. 65, No. 3, pp. 271-277, http://dx.doi.org/10.1016/j.rie.2010.11.004 Go to original source...
  17. Hubbard, R. G. (2006), "The U.S. Current Account Deficit and Public Policy." Journal of Policy Modeling, Vol. 28, No. 6, pp. 665-71, http://dx.doi.org/10.1016/j.jpolmod.2006.06.006 Go to original source...
  18. Kalou, S., Suzanna, M. P. (2012), "The Twin Deficits Hypothesis: Revisiting an EMU Country." Journal of Policy Modeling, Vol. 34, No. 2, pp. 230-241, http://dx.doi.org/10.1016/j.jpolmod.2011.06.002 Go to original source...
  19. Khalid, A. M., Guan, T. W. (1999), "Causality Tests of Budget and Current Account Deficits: Cross-Country Comparisons." Empirical Economics, Vol. 24, No. 3, pp. 389-402, http://dx.doi.org/10.1007/s001810050062 Go to original source...
  20. Labonte, M. (2005), "Is the U.S. Trade Deficit Caused by a Global Saving Glut?" CRS Report for Congress.
  21. Lipsey, R. G., Courant, P. N., Ragan, C. T. S. (1999), Economics, 11th Ed. United States: The Addison-Wesley Publishing Company.
  22. Makin, A., Narayan, P. (2013), "Re-examining the Twin Deficits Hypothesis: Evidence from Australia." Empirical Econonomics, Vol. 45, No. 2, pp. 817-829, http://dx.doi.org/10.1007/s00181-012-0628-7 Go to original source...
  23. Mankiw, N. G. (2009), Macroeconomics, 7th Ed. New York: Worth Publishers.
  24. Mann, C. L. (2002), "Perspectives on the U.S. Current Account Deficit and Sustainability." Journal of Economic Perspectives, Vol. 16, No. 3, pp. 131-52, http://dx.doi.org/10.1257/089533002760278758 Go to original source...
  25. Mark, N. C., Ogaki, M., Sul, D. (2005), "Dynamic Seemingly Unrelated Cointegrating Regressions." Review of Economic Studies, Vol. 72, No. 3, pp. 797-820, http://dx.doi.org/10.1111/j.1467-937X.2005.00352.x Go to original source...
  26. Mccoskey, S., Kao, C. (1998), "A Residual-Based Test of the Null of Cointegration in Panel Data." Econometric Rewiews, Vol. 17, No. 1, pp. 57-84, http://dx.doi.org/10.1080/07474939808800403 Go to original source...
  27. Pesaran, H. M. (2004), "General Diagnostic Tests for Cross Section Dependence in Panels." Cambridge University, Working Paper No. 0435. Go to original source...
  28. Pesaran, H. M. (2007), "A Simple Panel Unit Root Test in the Presence of Cross-Section Dependence." Journal of Applied Econometrics, Vol. 22, No. 2, pp. 265-312, http://dx.doi.org/10.1002/jae.951 Go to original source...
  29. Pesaran, H. M., Ullah, A., Yamagata, T. (2008), "A Bias-adjusted LM Test of Error CrossSection Independence." Econometrics Journal, Vol. 11, No. 1, pp. 105-27, http://dx.doi.org/10.1111/j.1368-423X.2007.00227.x Go to original source...
  30. Rafid, S. (2012), "Fiscal Stance, the Current Account and the Real Exchange Rate: Some Empirical Estimates from a Time-Varying Framework." Structural Change and Economic Dynamics, Vol. 21, pp. 276-290 Go to original source...
  31. Ratha, A. (2012), "Twin Deficits or Distant Cousins? Evidence from India." South Asia Economic Journal, Vol. 13, pp. 51-68. Go to original source...
  32. Saeed, S., Khan, M. A. (2012), "Ricardian Equivalence Hypothesis and Budgetary Deficits: The Case of Pakistan 1972-2008." Interdisciplinary Journal of Contemporary Research in Business, Vol. 3, pp. 1432-1446
  33. Sahoo, D., Das, A. B. (2012), "ARDL Co-integration Approach to the External and Internal Sector Equilibrium of India." Procedia - Social and Behavioral Sciences, Vol. 62, pp. 812-816, http://dx.doi.org/10.1016/j.sbspro.2012.09.137 Go to original source...
  34. Sen, A., Senturk, M., Sancar, C., Akbas, Y. E. (2014), "Empirical Findings on Triplet Deficits Hypothesis: The Case of Turkey." Journal of Economic Cooperation and Development, Vol. 35, No. 1, pp. 81-102.
  35. Szakolczai, G. (2006), "The Triple Deficit of Hungary." Hungarian Statistical Review, Vol. 84, pp. 40-62.
  36. Tang, T. C. (2014), "Fiscal Deficit, Trade Deficit, and Financial Account Deficit: Triple Deficits Hypothesis with the U.S. Experience." Monash University Business and Economics Discussion Paper.
  37. Trachanas, E., Katrakilidis, C. (2013), "The Dynamic Linkages of Fiscal and Current Account Deficits: New Evidence from Five highly Indebted European Countries Accounting for Regime Shifts and Asymmetries." Economic Modelling, Vol. 31, pp. 502-10, http://dx.doi.org/10.1016/j.econmod.2012.12.026 Go to original source...
  38. Vamvoukas, G. A. (1999), "The Twin Deficits Phenomenon: Evidence from Greece." Applied Economics, Vol. 31, No. 9, pp. 1093-1100. Go to original source...
  39. Westerlund, J., Edgerton, D. L. (2007), "A Panel Boostrap Cointegration Test." Economic Letters, Vol. 97, pp. 185-190. Go to original source...
  40. World Bank (2012), Global Economic Prospects Report. Washington DC: World Bank.
  41. Zamanzadeh, A., Mehrara, M. (2011), "Testing Twin Deficits Hypothesis in Iran." Interdisciplinary Journal of Research in Business, Vol. 1, pp. 7-11.

This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.