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On the Twin Deficits Hypothesis and the Import Propensity in Transition Countries

This article uses co-integration and related techniques to test for a long-run causal relationship between the fiscal and external deficits of three post-transition countries in Central and Eastern Europe. In addition, an import propensity model is tested by applying OLS and GMM. All the results reject the Twin Deficits Hypothesis. Instead, the results demonstrate that specific transition factors such as a high import intensity of exports and net capital inflows affect the trade balance.

26. January 2012

Authors Hubert Gabrisch

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On the Twin Deficits Hypothesis and the Import Intensity in Transition Countries

Hubert Gabrisch

in: International Economics and Economic Policy, No. 2, 2015

Abstract

This article aims to explain the increasing deficits in the trade and current account balances of three post-transition countries–Czech Republic, Hungary, and Poland–by testing two hypotheses: the twin deficit hypothesis and increasing import intensity of export production. The method uses co-integration and related techniques to test for a long-run causal relationship between the fiscal and external deficits of three post-transition countries in Central and Eastern Europe. In addition, an import intensity model is tested by applying OLS and GMM. All the results reject the Twin Deficits Hypothesis. Instead, the results demonstrate that specific transition factors such as net capital flows and, probably, a high import intensity of exports affect the trade balance.

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