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

Yıl 2020, Cilt: 16 Sayı: 3, 494 - 512, 13.10.2020

Naib Alakbarov , Mahmut Ünsal Şaşmaz

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

Cited By: 2

Öz

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.

Anahtar Kelimeler

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

Kaynakça

• Acaravci, A., & Öztürk, I. (2008). Twin deficit phenomenon: Empirical evidence from the ARDL bound test approach for Turkey. Bulletin of Statistics and Economics, 2 (A08), 57-64.
• Ahmad, A. H., Aworinde, O. B., & Martin, C. (2015). Threshold cointegration and the short-run dynamics of twin deficit hypothesis in African countries. The Journal of Economic Asymmetries, 12 (2), 80-91.
• Akbostanci, E., & Tunç, G. İ. (2001). Turkish twin effects: An error correction model of trade balance (No. 0106). ERC-Economic Research Center, Middle East Technical University.
• Altintas, 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, 74, 30-45.
• Aristovnik, A., & Djurić, S. (2010). Twin deficits and the Feldstein-Horioka puzzle: A comparison of the EU member states and candidate countries. MPRA Paper No. 24149.
• Bakarr, T. A. (2014). Fiscal deficits and current account imbalances: Evidence from sierra leone. International Journal of Business and Social Science, 5(8).
• Barro, R. J. (1974). Are government bonds net wealth? Journal of Political Economy, 82, 1095-1117. Bartolini, L., & Lahiri, A. (2006). Twin deficits, twenty years later. Federal Reserve Bank of New York. Current Issues in Economics, 12 (7), 1-7.
• Bayar, Y., & Sasmaz, M. U. (2019). Foreign borrowing, foreign direct investment inflows and economic growth in European Union transition economies. Eastern Journal of European Studies, 10(2).
• Bolat, S., Belke, M., & Aras, O. (2011). Türkiye’de ikiz açık hipotezinin geçerliliği: Sınır testi yaklaşımı. Maliye Dergisi, 161(1), 347-364.
• Bolat, S., Değirmen, S., & Şengönül, A. (2014). Does triple deficits have (UN) stable causality for the EU members? Evidence from bootstrap-corrected causality tests. Procedia Economics and Finance, 16, 603-612.
• Breusch, T. S., & Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. Review of Economic Studies, 47(1), 239-253.
• Buchanan, J. M. (1976). Barro on the Ricardian equivalence theorem. Journal of political economy, 84(2), 337-342.
• Caporale, G. M., Panopoulou, E., & Pittis, N. (2005). The Feldstein-Horioka puzzle revisited: A montecarlo study. Journal of International Money and Finance, 24(7), 1143-1149.
• Dumitrescu, E. I., & Hurlin, C. (2012). Testing for Granger noncausality in heterogeneous panels. Economic Modelling, 29(4), 1450-1460.
• Eberhardt, M., & Bond, S. (2009). Cross-section dependence in nonstationary panel models: A novel estimator. MPRA Paper 17692, University Library of Munich. http://mpra.ub.uni-muenchen. de/17692.pdf
• Eberhardt, M., & Teal, F. (2010). Productivity analysis in global manufacturing production. Department of Economics, University of Oxford. http://www.economics.ox.ac.uk/research/WP/pdf/paper515. pdf
• Eberhardt, M., & Teal, F. (2011). Econometrics for grumblers: A new look at the literature on cross country growth empirics. Journal of Economic Surveys, 25(1), 109-155.
• ECB. (2007). How the euro became our money: A short history of the euro banknotes and coins. Retrieved April 23, 2020, from https://www.ecb.europa.eu/pub/pdf/other/euro_became_our_moneyen.pdf
• Emirkadı, Ö. (2017). Türkiye ekonomisinde ikiz açıklar: Kuramsal yaklaşımlar ve ampirik literatür üzerine değerlendirmeler. Adnan Menderes Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, 4(3), 81-99.
• Enders, W., & Lee, B. S. (1990). Current account and budget deficits: Twins or distant cousins?. The Review of Economics and Statistics, 373-381.
• Erdinç, Z. (2008). İkiz açıklar hipotezinin Türkiye’de 1950-2005 yılları arasında eşbütünleşme analizi ve Granger nedensellik testi ile incelenmesi. Anadolu Üniversitesi Sosyal Bilimler Dergisi, 8 (1), 209-222.
• Evans, P. (1988). Are consumers ricardian? Evidence for the United States. Journal of Political Economy, 96(5), 983-1004.
• Feldstein, M. S. (1986). The budget deficit and the dollar. NBER Macroeconomics Annual, 1, 355-392.
• Feldstein, M., & Horioka, C. (1980). Domestic saving and international capital flows. Economic Journal, 90, 314-329.
• Fidrmuc, J. (2003). The Feldstein-Horioka puzzle and twin deficits in selected countries. Economics of Planning, 36(2), 135-152.
• Frankel, J. (2006). Could the twin deficits jeopardize US hegemony?, Journal of Policy Modeling, 28(6), 653-663.
• Hansen, B. E., & Seo, B. (2002). Testing for two-regime threshold cointegration in vectorerror-correction models. Journal of econometrics, 110(2), 293-318.
• Helleiner, E. (2011). Understanding the 2007-2008 global financial crisis: Lessons for scholars of international political economy. Annual review of political science, 14, 67-87.
• Herwartz, H., & Siedenburg, F. (2007). Determinants of current account imbalances in 16 OECD countries: An out-of-sample perspective. Review of World Economics, 143(2), 349-374.
• Holmes, M. J. (2011). Threshold cointegration and the short-run dynamics of twin deficit behaviour. Research in Economics, 65(3), 271-277.
• İpek, E., & Kizilgöl, Ö. A. (2016). Türkiye ekonomisinde üçüz açik/triple deficit in Turkish economy. Ege Akademik Bakis, 16(3), 425.
• Karanfil, M., & Kılıç, C. (2015). Türkiye ekonomisinde üçüz açık hipotezinin geçerliliği: Zaman serisi analizi. Uluslararası Yönetim İktisat ve İşletme Dergisi, 11(24), 1-20.
• Kaufmann, S., Scharler, J., & Winckler, G. (2002). The Austrian current account deficit: Driven by twin deficits or by intertemporal expenditure allocation?. Empirical Economics, 27(3), 529-542.
• Kim, S., & Roubini, N. (2008). Twin deficit or twin divergence? Fiscal policy, current account, and realex change rate in the US. Journal of international Economics, 74(2), 362-383.
• Koçbulut, Ö., & Altıntaş, H. (2016). İkiz açıklar ve Feldstein-Horioka Hipotezi: OECD ülkeleri üzerine yatay kesit bağımlılığı altında yapısal kırılmalı panel eşbütünleşme analizi. Erciyes Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 48, 145-174.
• Kraay, A., & Ventura, J. (2005). The dot-com bubble, the Bush deficits, and the US current account. NBER Working Papaer Series 11543.
• Lau, E., & Baharumshah, A. Z. (2006). Twin deficits hypothesis in SEACEN countries: A panel data analysis of relationships between public budget and current account deficits. Applied Econometrics and International Development, 6(2).
• Miller, S. M., & Russek, F. S. (1989). Are the twin deficits really related?. Contemporary Economic Policy, 7(4), 91-115.
• Oktar, S., & Yüksel, S. (2016). Avrupa birliği ülkelerinde ikiz açık hipotezinin geçerliliği. Kastamonu Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 11(1), 46-61.
• Özdamar, G. (2015). Factors affecting current account balance of Turkey: A survey with the cointegrating regression analysis. Journal of Business, Economics and Finance, 4(4), 633-658.
• Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels. CESifo Working Papers No.1233, 255-260.
• Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265-312.
• Pesaran, M. H., & Yamagata, T. (2008). Testing slope homogeneity in large panels. Journal of Econometrics, 142(1), 50-93.
• Pesaran, M. H., Ullah, A., & Yamagata, T. (2008). A bias adjusted LM test of error cross section independence. The Econometrics Journal, 11(1), 105-127.
• Sever, E., & Demir, M. (2007). Türkiye’de bütçe açığı ile cari açık arasındaki ilişkilerin VAR analizi ile incelenmesi. Eskişehir Osmangazi Üniversitesi İİBF Dergisi, 2(1), 47-63.
• Sevinç, E. (2016). Türkiye’de cari açık ve bütçe açığı arasındaki ilişkinin nedensellik analizi. Bankacılar Dergisi, 96, 79-101.
• Turan, T., & Karakaş, M. (2017). İkiz açıklar hipotezine doğrusal olmayan sınır testi yaklaşımı. Maliye Dergisi, 173, 211-227.
• Uğurlu, E., & Düzgün, R. (2009). Türkiye ekonomisi için Ricardo eşitliği hipotezinin test edilmesi. Marmara Üniversitesi İktisadi ve İdari Bilimler Dergisi, 26(1), 99-116.
• Utkulu, U. (2003). Türkiye’de bütçe açıkları ve dış ticaret açıkları gerçekten ikiz mi? Koentegrasyon ve nedensellik bulguları. Dokuz Eylül Üniversitesi İktisadi İdari Bilimler Fakültesi Dergisi, 18(1), 45-61.
• Westerlund, J., & Edgerton, D. L. (2008). A simple test for cointegration in dependent panels with structural breaks. Oxford Bulletin of Economics and Statistics, 70(5), 665-704.
• Winner, L. E. (1993). There lation ship of the current account balance and the budget balance. The American Economist, 37(2), 78-84.
• Wirasti, A., & Widodo, T. (2017). Twin deficit hypothesis and Feldstein-Horioka hypothesis: Case study of indonesia. MPRA Paper No. 77442.
• World Bank. (2019). World Development Indicators. Retrieved November 12, 2019, from https:// datacatalog.worldbank.org/dataset/world-development-indicators
• Zamanzadeh, A., & Mehrara, M. (2011). Testing twin deficits hypothesis in Iran. Interdisciplinary Journal of Research in Business, 1(9), 7-11.