Asymmetries in Twin Deficit Hypothesis: Evidence from CEE Countries

Abstract

We apply nonlinear autoregressive distributed lag (NARDL) approach to investigate the relationship between budget deficit and current account deficit in Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia. Our results indicate that changes in current account deficit have a significant effect on the budget deficit in Poland and Romania in the long-run and Croatia, Poland, Romania and Slovakia in the short-run. On the other hand, changes in budget deficit significantly affect the current account deficit in Czech Republic, Hungary, and Slovakia in the long-run and in Czech Republic, Hungary, Slovakia, and Romania in the short-run. Therefore, we conclude that the twin deficit hypothesis is valid for Czech Republic, Hungary and Slovakia but not for the case of Poland, Croatia, Romania and Slovenia in the long-run. Finally, we also present evidence for the existence of asymmetric effects in this context.