TWIN SONS OF DIFFERENT MOTHERS: THE LONG AND THE SHORT OF THE TWIN DEFICITS DEBATE

Interest in the twin deficits hypothesis fluctuates in tandem with the U.S. current account deficit. Surprisingly though, a statistically robust relationship between budget and trade deficits has been difficult to pin down. We argue that a big part of this difficulty is due to the failure to allow f...

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Bibliographic Details
Published in:Economic inquiry 2009-10, Vol.47 (4), p.625-638
Main Authors: GRIER, KEVIN, YE, HAICHUN
Format: Article
Language:English
Subjects:
Analysis
Budget deficit
Budget deficits
Correlation analysis
Current account
Deficit financing
Econometrics
Forecasts and trends
GDP
Gross Domestic Product
Hypotheses
Interest rates
International monetary economics
Lagrange multiplier
Macroeconomics
Regression analysis
Stochastic models
Structural change
Studies
Time series
Trade deficit
Twins
U.S.A
Variables
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Summary:Interest in the twin deficits hypothesis fluctuates in tandem with the U.S. current account deficit. Surprisingly though, a statistically robust relationship between budget and trade deficits has been difficult to pin down. We argue that a big part of this difficulty is due to the failure to allow for structural breaks in the series when (either explicitly or implicitly) modeling their time series properties. We show that both series are break stationary (and conditionally heteroskedastic) and argue that while there is no common pattern in the long run, the short‐run dynamics reveal a sizeable and fairly persistent positive relationship between budget deficit shocks and current account deficit shocks. (JEL F41, E6, H6)
ISSN:0095-2583
1465-7295
DOI:10.1111/j.1465-7295.2008.00162.x