Twin Deficits Analysis for Central and Eastern European Countries

In open economy macroeconomics, the positive relationship between budget deficit and current account deficit is known as twin deficits hypothesis. According to this hypothesis, a government budget deficit leads to a current account deficit. Although Keynes talked about it early on, this relationship has been significant for the literature since 1980s with the increase of both deficits in the USA. However, this close relationship has also been experienced by many European countries. Moreover, emerging markets often encountered the same problem in the recent liquidity abundant period. There are several studies analyzing this relationship however there is no consensus for the existence of twin deficits. Hence, this paper aims to analyze this hypothesis for a group of Central Eastern European (CEE) countries using quarterly data between 1996 and 2009. Differing from traditional ones we employ panel data analysis through panel unit roots and panel cointegration tests to the CEE countries. Our preliminary empirical results show that unlike studies employing traditional methods twin deficit hypothesis is supported using these techniques.