Twin sons of different mothers: The long and the short of the twin deficits debate

Kevin Grier, Haichun Ye

Research output: Contribution to journalArticle

22 Scopus citations

Abstract

Interest in the twin deficits hypothesis fluctuates in tandem with the U.S. current account deficit. Surprisingly though, a statistically robust relationship between budget and trade deficits has been difficult to pin down. We argue that a big part of this difficulty is due to the failure to allow for structural breaks in the series when (either explicitly or implicitly) modeling their time series properties. We show that both series are break stationary (and conditionally heteroskedastic) and argue that while there is no common pattern in the long run, the short-run dynamics reveal a sizeable and fairly persistent positive relationship between budget deficit shocks and current account deficit shocks.

Original languageEnglish
Pages (from-to)625-638
Number of pages14
JournalEconomic Inquiry
Volume47
Issue number4
DOIs
StatePublished - Oct 2009

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