The dynamic linkages of budget deficits and current account deficits nexus in EU countries: Bootstrap panel Granger causality test

The aim of this study is to test the relationship between budget deficit and current account deficit for EU-27 countries over the period 2002Q1-2013Q4 using different panel bootstrap causality test. For this analysis, we employed a method developed by Emirmahmutoglu and Kose (2011), which is based on the estimation of the panel model with bootstrapping critical values. We found strong empirical support for bidirectional causality between budget deficit and current account deficit for Belgium, Czech Republic, Denmark, Estonia, Germany, Italy, Spain, and UK, pointing as twin deficit hypothesis supported by Keynesian view. In addition the main results, we found that there is no relationship between budget deficit and current account deficit for 9 EU countries: Austria, France, Hungary, Ireland, Luxembourg, Netherlands, Poland, Portugal, and Romania, indicating support for the Ricardian Equivalence Hypothesis. © 2014, International Economic Societ