The Twin Deficits Hypothesis and Reverse Causality: A Short-Run Analysis of Peru

7 Pages Posted: 7 Dec 2013 Last revised: 7 Mar 2019

See all articles by Cesar R. Sobrino

Cesar R. Sobrino

Universidad Ana G. Mendez, Recinto de Gurabo

Date Written: November 21, 2013

Abstract

This study examines causation between the current account and the fiscal surplus and fiscal spending for a commodity-based economy, Peru. Using quarterly data for the open economy, the outcomes reject the twin deficits hypothesis. Instead, the evidence points strongly to reverse causality, that is, the current account causes the fiscal account. However, unlike previous empirical evidence on this subject, for a year, the reverse causality indicates a negative causation because the fiscal consumption is not smoothed when positive permanent shocks to the current account occur. In the short run, the fiscal policy has no effect on the current account, but improvements in the current account increase the probability of attaining a lower bounded fiscal deficit. This evidence is consistent with a small open commodity-based economy that is highly exposed and sensitive to external price shocks.

Keywords: Current Accout, Budget Deficit, Time Series Model

JEL Classification: F32, C32, H62

Suggested Citation

Sobrino, Cesar R., The Twin Deficits Hypothesis and Reverse Causality: A Short-Run Analysis of Peru (November 21, 2013). Journal of Economics, Finance & Administrative Science, Vol. 18, No. 34, 2013, Available at SSRN: https://ssrn.com/abstract=2358023

Cesar R. Sobrino (Contact Author)

Universidad Ana G. Mendez, Recinto de Gurabo ( email )

PO BOX 3030
PO BOX 3030
Gurabo, 00778
Puerto Rico

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