Panoeconomicus 2013 Volume 60, Issue 2, Pages: 161-178
https://doi.org/10.2298/PAN1302161K
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Financial integration, euro and the twin deficits of southern Eurozone countries
Kosteletou Nikolina E. (Department of Economics, National and Kapodistrian University of Athens, Athens, Greece)
The purpose of this study is the examination of the relationship between
fiscal and Current Account balances for the countries of southern eurozone.
The twin deficit hypothesis is tested within the context of a portfolio model
involving variables from the financial sector. Empirical analysis is
conducted with panel data, for the period 1991-2011. Evidence is provided to
support the twin deficit hypothesis. Additionally, it is found that it is not
only the fiscal policy of the southern eurozone countries that affects their
Current Account balances, but also the fiscal policy of the eurozone surplus
countries of the north. Interdependence of euro-zone countries suggests that
fiscal policy can be used for the elimination of external disequilibrium.
Therefore, fiscal policy should be coordinated but not uniformly applied.
Keywords: current account, budget balance, twin deficits, financial integration, fiscal coordination