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On the twin deficits hypothesis and the import intensity in transition countries

Abstract

This article aims to explain the increasing deficits in the trade and current account balances of three post-transition countries–Czech Republic, Hungary, and Poland–by testing two hypotheses: the twin deficit hypothesis and increasing import intensity of export production. The method uses co-integration and related techniques to test for a long-run causal relationship between the fiscal and external deficits of three post-transition countries in Central and Eastern Europe. In addition, an import intensity model is tested by applying OLS and GMM. All the results reject the Twin Deficits Hypothesis. Instead, the results demonstrate that specific transition factors such as net capital flows and, probably, a high import intensity of exports affect the trade balance.

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Notes

  1. 1.

    Public investment could be part of the government financial deficit and, hence, would be added as a second independent public expenditure on the right side of Eq. (1). Such an addition would not change the conclusions of all considerations that follow.

  2. 2.

    The tax rate, for example, has to be considered in the income creation process after a fiscal stimulus.

  3. 3.

    Somewhat different, Aristovnik (2008) tested a short-term panel-model with variables in their first differences for 26 (and 14) transition countries, and found evidence for a ‘short-term’ TDH.

  4. 4.

    I follow the presentation of Fidrmuc (2003), and Marinheiro (2006).

  5. 5.

    The critical reader will note that I did not calculate and use the primary fiscal balance. Excluding interest payments would bias regressions with the current account (which includes interest payments) and also the trade balance, since net interest payments affect the exchange rate.

  6. 6.

    Granger causality tests confirm these results.

  7. 7.

    No Chow test available for regressions with this estimation method.

  8. 8.

    Results and the entire Eviews-workfile can be provided on request.

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Acknowledgments

I would like to thank two anonymous referees for helpful comments. Any remaining errors are my own.

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Correspondence to Hubert Gabrisch.

Additional information

I dedicate this study to my friend and teacher Kazimierz Łaski, who celebrated his 92nd birthday in December 2013.

Appendix

Appendix

Table 4 Unit root test results (ADF-test) for the variables
Table 5 Residual unit root test (ADF-test) results from regressions with fb as independent variable

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Gabrisch, H. On the twin deficits hypothesis and the import intensity in transition countries. Int Econ Econ Policy 12, 205–220 (2015). https://doi.org/10.1007/s10368-014-0272-0

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Keywords

  • Twin deficits
  • Import intensity
  • Transition countries

JEL classification

  • E62
  • F41
  • H62