Revisiting the Twin Deficit Hypothesis for the Economies of Europe

This study presents empirical evidence linking the current account balance to its major determinants such as exchange rate, interest rate and budget balance in 7 of the EU member countries: Bulgaria, Greece, Ireland, Italy, Latvia, Portugal and Spain. Using the panel version of various cointegration tests, we find a long-run relationship between the current account and its determinants. The long-run coefficient of the interest rate is found statistically significant in all estimation techniques. On the other hand, weak evidence is found for the existence of the twin deficit hypothesis