Naslov
The Twin Deficits Hypothesis - A Case Study Of Croatia

Autori
Šergo, Zdravko ; Poropat, Amorino ; Budimir, Ana

Vrsta, podvrsta i kategorija rada
Radovi u zbornicima skupova, cjeloviti rad (in extenso), znanstveni

Izvornik
An Enterprise Odyssey: Corporate Governance and Public Policy - Path to Sustainable Future / Galetić, Lovorka ; Šimuruna, Jurica - Zagreb : Ekonomski fakultet Sveučilišta u Zagrebu, 2012, 121-136

ISBN
978-953-6025-57-2

Skup
6th International Conference: An Enterprise Odyssey

Mjesto i datum
Šibenik, Hrvatska, 13.06.2012. - 16.06.2012

Vrsta sudjelovanja
Predavanje

Vrsta recenzije
Međunarodna recenzija

Ključne riječi
Budget Deficits; Trade Deficits; Keynesian proposition; Ricardian equivalence; Granger causality tests; Croatia

Sažetak
The main purpose of this paper is to analyze the relationship between the budget and trade deficits in the small, open, Croatian economy. Croatia is a country which has dragged along with the chronic problem of trade deficit balance for two decades, so the question of sustainability of further life above production capability is posed, as well as the question of further growth of public debt, caused by the perpetuity of budget deficits. In line with the deterioration of budget deficits and the long-run persistence of trade deficits in Croatia, it is the optimal time to investigate the relationship between those twin deficits. This paper examines the inter-linkages between central budget balance, and external balance for Croatia. This study tries to test the Keynesian proposition and the Ricardian equivalence. The Keynesian proposition confirms the existence of a positive relationship between the two deficits, whereas the Ricardian equivalence argues that the budget and trade deficits are not correlated. To help in explaining the relationship between such deficits, a vector of variables that comprises budget deficit to GDP, trade deficit to GDP, investment minus savings to GDP and savings to GDP are included. Moreover, Granger causality test based on Vector Autoregressive (VAR) is utilized to underpin the direction of causality between trade deficits to GDP and fiscal deficits to GDP, as well as fiscal deficit to GDP and investment minus savings, and savings to GDP. Using quarterly data 1995Q1 and 2010Q3, the results of time series econometrics tests (i.e. unit root tests, causality tests) for the two candidate variables in testing Keynesian proposition, namely Government budget balance to GDP, and trade balance to GDP show following. For the regressions that tested for Granger Causality, two different models were tested. First Granger causality was tested to determine if Trade Deficit could be used to accurately predict Budget Deficit (Test 1, Table 1). The second model was to test if Granger causality existed in the reverse direction, i.e. if Budget Deficit was Granger-causal to Trade Deficit. (Test 2, Table 1.) The results of Test 1 concluded that χ2 = 10.376, with p = 0.0056. Test 2 determined that χ2 = 4.454, with p = 0.1078. Therefore, it can be concluded that at a 1% significance level, there is causal relationship between trade and budget deficit, in which permanent and huge long-run trade deficit Granger-cause Croatia's budget deficit. We can't state that this causal relationship goes in the opposite direction, as these deficits are not interrelated. Namely, we cannot say that budget deficit breaths trade deficit. In fact, trade deficit is “the predator” and budget deficit “the prey” in this game of causes and consequences. Therefore, the causal link is uni-directional in case of twin deficits. So, there is support for the Keynesian proposition. However, the direction of the causality is reversed, because of the important role of the currency appreciation tendency in Croatia’s economy since 1994 (as well as fixation to very strong started HRK/EURO exchange rate), and broader liberalization of trade, the trade deficit causes the budget deficit. In regard to Ricardian equivalence hypothesis, there is support for the REH in one way direction. The difference of investment and private savings to GDP Granger cause BDEF_Y. The deficit/surplus of investment over private savings causes problems in the budget deficit area. Further implication is that Croatian government can rely on cutting down the budget deficit to GDP ratio by narrowing up the gap between investment and private savings. In this sense, according to our final remarks budget deficit is not a fully controlled policy variable. The Croatian authorities should pay close attention primarily to trade deficit over GDP and secondary to the private-sector financial deficit/surplus over GDP. However. there is support for the Ricardian equivalence in the one way direction. The surplus of investment over private savings causes problems in the budget deficit area, which is capitalised in a public debt, therefore, less household savings are left which should be channelled to investment.

Izvorni jezik
Engleski

Znanstvena područja
Ekonomija

POVEZANOST RADA