Turkish Twin Effects: An Error Correction Model of Trade Balance

Twin deficit hypothesis mainly states that government budget deficits will cause trade deficits. However, this is not the only theoretically possible relationship between the budget deficit and the trade deficit. On the other extreme if Ricardian equivalence hypothesis holds it is also possible that two deficits are not related at all. In this study these hypotheses between the budget deficit and trade deficit for Turkey between 1987 - 2001 period are examined by using the cointegration methodology and by estimating an error correction model. This enabled us to search the relationship between the internal and external deficits both in the short-run and in the long-run. Our analysis showed that there is a long-run relationship between the two deficits. Also the short-run model yielded that worsening of the budget balance worsens the trade balance. Therefore we have concluded that the twin deficit hypothesis holds, and Ricardian equivalence hypothesis is not valid for Turkey during the study period.Twin deficits, trade deficit, budget deficit, Ricardian equivalence, cointegration, error correction models, unit roots, Turkey

Міжнародний порівняльний аналіз бюджетного дефіциту в Україні та Угорщині

Today government budget scarcity is a relevant problem both for advanced economies and developing countries. Investigation of problems of budget deficit and public debt has had a long history and nowadays it is covered both in modern Ukrainian and foreign scientific literature. The aim of the paper is to differ causes and factors of genesis of budget deficit, make statistical analysis of fiscal deficits in Ukraine and Hungary and develop recommendations for budget policy. Research methods are dialectical method, historical method, system approach, analysis and synthesis, comparison method, model building, statistical analysis. Detailed analysis of factors and reasons for formation of general government budget deficit has been given in the paper. Direct causes (such as periods of economic crises, fiscal stimulation, increase in public debt) and concomitant negative factors of deepening budget deficit (such as unfavorable structure of public debt, imbalances of regional development, disadvantages of organization of budget system, disproportionate growth of social expenditures, shadow economy) have been differentiated. A retrospective investigation of budget deficit in Ukraine and Hungary has been carried out. The study is based on indices of budget deficit (deficit coefficient, elasticity of deficit, growth rate of fiscal deficit etc.). Conclusions have been drawn about the depth of this problem in Ukraine and Hungary. The possibilities of implementation of Hungarian experience into Ukrainian economy have been substantiated. The concepts of government budget balancing have been revealed. The system of measures for public policy of budget deficit reduction has been developed, namely: use of acceptable concept of budget balancing, ensuring stable economic growth, ensuring relative decrease in government spending, improving its efficiency, easing impact of related negative factors.Сьогодні дефіцит державного бюджету є актуальною проблемою як для країн з розвиненою економікою, так і для країн, що розвиваються. Дослідження проблем бюджетного дефіциту та державного боргу має давню історію і в даний час висвітлюється як в сучасній українській, так і зарубіжній науковій літературі. Метою роботи є виявлення причин і факторів виникнення бюджетного дефіциту, проведення статистичного аналізу бюджетного дефіциту в Україні та Угорщині і розробка рекомендацій щодо бюджетної політики. Методи дослідження: діалектичний метод, історичний метод, системний підхід, аналіз і синтез, метод порівняння, моделювання, статистичний аналіз. У статті подано докладний аналіз факторів і причин формування дефіциту державного бюджету. Були диференційовані прямі причини (такі як періоди економічних криз, податково-бюджетне стимулювання, збільшення державного боргу) і супутні негативні чинники поглиблення дефіциту бюджету (такі як несприятлива структура державного боргу, дисбаланси регіонального розвитку, недоліки організації бюджетної системи, непропорційне зростання соціальних витрат, тіньова економіка). Проведено ретроспективне дослідження дефіциту бюджету в Україні і Угорщині. Дослідження засноване на показниках дефіциту бюджету (коефіцієнт дефіциту, еластичність дефіциту, темпи зростання дефіциту бюджету та ін.). Зроблено висновки про глибину цієї проблеми в Україні та Угорщині. Обґрунтовано можливості впровадження угорського досвіду в українську економіку. Розкрито концепції балансування державного бюджету. Розроблено систему заходів державної політики щодо скорочення бюджетного дефіциту, а саме: використання прийнятної концепції бюджетного балансування, забезпечення стабільного економічного зростання, забезпечення відносного зниження державних витрат, підвищення їх ефективності, пом'якшення впливу супутніх негативних чинників

Optimal Budget Deficit Rules

This paper discusses the problem of the optimal determination of budget deficit limits in cases where the fiscal authority wishes to keep the budget deficit close to a reference value. It is assumed that the fiscal authority minimizes the expected discounted value of squared deviations from the reference value. Lump-sum and proportional intervention costs are considered. This paper is also an example of integration between stochastic process optimal control methods and the continuous time stochastic models. In fact, the characteristics of the stochastic process that rules the path of the budget deficit are taken from a previously developed continuous time stochastic model (Amador, 1999). Finally, simulation methods are used in order to conduct a comparative dynamics analysis. The paper concludes that, in the case of proportional intervention costs, the optimal ceiling depends positively on the cost parameter and on the variance of the budget deficit. On the contrary, the optimal ceiling depends negatively on the average budget deficit. These results remain valid in the case where there are both lump-sum and proportional intervention costs. Finally, in a stationary equilibrium context, we conclude that economies with higher tax rates and lower public expenditure should set higher budget deficit ceilings. The same is true for economies with a higher variance in technology and public expenditure shocks.

The impact of a budget deficit on inflation in Zimbabwe

The Zimbabwean economy is one of the many numbers of countries that has experienced a relatively high fiscal deficit for a prolonged period with the result of a high inflationary environment. This paper examines the deficit-inflation nexus in the Zimbabwean economy and establishes the causal link that runs from the budget deficit to the inflation rate using Johansen (1991, 1995) cointegration technique over the period 1980 – 2005. Due to massive monetization of the budget deficit, significant inflationary effects are found for increases in the budget deficit.Budget deficit; inflation; contegration

Four Budget Deficit Theories in One Model

The analysis of many budget deficit theories is too demanding for undergraduate students. This paper illustrates governments' incentives to create budget deficits by means of a simple graphical model. It integrates four budget deficit theories: The theory of the state as Leviathan, two different strategic deficit theories, and the theory of tax competition. These theories are embedded into an illustrative example of political competition between a conservative party and a liberal party. The main pedagogical benefits of the model are its intuitive setup and its waiver of demanding analysis.budget deficit, public debt, teaching, macroeconomics instruction

The Gramm-Rudman-Hollings act: More revisions?

During the first half of the eighties, the U.S. federal deficit rose from $74 bn to$ 212 bn. When the Congressional Budget Office (CBO) projected in August 1985 that the deficit would further increase to $ 285 bn by 1990, the Gramm-Rudman-Hollings Act (GRH Act) was put into law. Its purpose is to help the government with cutting the deficit, even more, to force it into doing so. Congress and the president put themselves into this confined situation by voting for and signing the bill, respectively, because they realized that their differences in budget priorities would continue to cause budget deadlocks. The GRH Act specifies deficit targets for each year which decline at equal steps to reach zero in the final year, which is now supposed to be 1993. There have been deficit targets before, but they were regularly passed over in the budget process. This is not possible now, because the sequestration procedure,- the prominent feature of the GRH Act, requires that federal government expenditures - on defense and nondefense likewise - be cut automatically if the regular budget process does not reduce the federal budget deficit to the specified amount.

Testing the Keynesian Proposition of Twin Deficits in the Presence of Trade Liberalisation: Evidence from Sri Lanka after War: the case of a bridge too far?

This paper examines the long-run and short-run relationships between the current account deficit, budget deficit, savings and investment gap and trade openness in Sri Lanka using the autoregressive distributive lagged (ARDL) approach. The time series properties of the variables, in the presence of endogenous structural breaks, was previously analysed using Perron’s (1997) additive outlier (AO) and innovational outlier (IO) models. The empirical analysis supports the Keynesian view that a link exists between the current account, budget deficit and savings and investment gap. We found that trade openness has a positive effect on the current account deficit, but is statistically insignificant, and offer some strategies to stabilise the budget deficit and current account deficits in Sri Lanka.twin deficit, structural change, unit roots, ARDL

Economic implications from deficit finance

The paper enlightens popular part of the budget policy - deficit finance. In the process of securing economic conditions to surpass the current economic crises, the governments all over the world incline towards debt deficit finance. The intention is to describe the implications such as multiplier effect, crowding out effect, correlation between budget and trade deficit. One of them are positive, they increase the aggregate demand and national income, other negative in term that they crowd out the private sector from the capital market under increased demand for loanable funds. --Budget deficit,Crowding out,Twin deficits,Exchange rates

German unification and its impact on net savings

The obsolete capital stock in eastern Germany has to be rebuilt. This will increase the capital demand in Germany for the next few years. In addition to the increased demand for capital, government transfers need to be financed. The macroeconomic accounting identity requires that net savings of the private sector and the government budget balance be equal to the current account. The DM150 billion swing in the current account from a surplus to a deficit between 1989 and 1991 must therefore find its counter expression in either net savings of the private sector or the budget deficit. If a narrow concept of the government budget deficit is used, there would be a government budget deficit of roughly 3-4 percent of GNP in the period 1991-1993, which is not too disturbing. In this case, however, net savings of the private sector, which would amount to 1- 2 percent of GNP, appear to be relatively low because the sums not included in the government budget deficit then show up as negative savings in the business sector. A case in point is the Treuhand's deficit. If a broader concept of the government budget deficit is applied, there would be a budget deficit reaching 7-8 percent of GNP in 1992 and 1993. In that case, savings of the private sector are artificially blown up because capital transfers to firms, for instance, the infusion of new capital into Treuhand firms, are part of savings in the private sector. The need to rebuild the capital stock in eastern Germany produces pressure for a higher longterm interest rate in Germany; this implies that the mark appreciates, which has already occurred. Only if severe policy mistakes are made will a risk premium on the German currency be required, which would imply a depreciation. --