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The Impact Of Public Debt On The Twin Imbalances In Europe: A Threshold Model

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  • Veronika Šuliková
  • Anna Tykhonenko

Abstract

Recent empirical research rejecting twin deficits in indebted countries and current account imbalances adjustment in Europe led to the idea to test the twin imbalances at different public debt-to-GDP intervals. The analysis covers 14 EU countries over the time period 1995-2012. A panel data threshold model with fixed effects estimates two debt-toGDP thresholds (40.2% and 96.6%), which determine three debt-to-GDP intervals in the twin relationship. If public debtto-GDP is less than 40.2%, the model determines a negative relationship (twin divergence) between budget balance and current account. Twin deficits (surpluses) are confirmed exclusively if debt-to-GDP is in the interval between 40.2% and 96.6%. A twin divergence is also confirmed if public debt-to-GDP is more than 96.6% (e.g., as in Greece and Italy). The results confirm that increased indebtedness in European countries contributed to their current account imbalance adjustment.

Suggested Citation

  • Veronika Šuliková & Anna Tykhonenko, 2017. "The Impact Of Public Debt On The Twin Imbalances In Europe: A Threshold Model," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 62(213), pages 27-44, April - J.
    • Handle: RePEc:beo:journl:v:62:y:2017:i:213:p:27-44
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    More about this item

    Keywords

    twin imbalances; twin deficits; twin divergence; public debt; panel data threshold model;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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