What does precede what? Relationship between the fiscal result and the trade balance: empirical evidence of reverse twin deficits during 1995-2021
DOI:
https://doi.org/10.35319/lajed.202543554Keywords:
Trade balance, primary fiscal balance, primary public expenditure, reverse twin deficits hypothesis, external shock, cointegrationAbstract
This study examines the dynamic relationship between the trade balance and the primary fiscal balance in Bolivia during the period 1995-2021, aiming to determine which of these balances precedes the other and the direction of causality. Using quarterly data and a wide range of robust econometric methodologies –including Granger causality tests, error correction models (VEC, ARDL, FMOLS, CCR), and nonlinear models (NARDL)– empirical evidence consistent with the reverse twin deficits hypothesis was found. The results reveal that declines in the trade balance precede and lead to reductions in the primary fiscal balance, as well as increases in primary public spending. This transmission mechanism suggests that the Bolivian government uses public spending as a countercyclical tool to mitigate the adverse effects of trade deficits on aggregate demand. This phenomenon appears to be driven, in essence, by Bolivia’s heavy reliance on the international prices of the natural resources it exports, which play a crucial role in the dynamics of the trade balance.
Downloads
References
Afonso, A., Huart, F., Tovar Jalles, J. y Stanek, P. (2022). Twin deficits revisited: A role for fiscal institutions? Journal of International Money and Finance, 121, 102506.
Anoruo, E. y Ramchander, S. (1998). Current account and fiscal deficits: Evidence from five developing economies of Asia. Journal of Asian Economics, 9(3), 487-501.
Baum, C. F., Hurn, S. y Otero, J. (2021). The dynamics of U.S. industrial production: A time-varying Granger causality perspective. Econometrics and Statistics, 33, 13-22.
Baxter, M. (1995). International Trade and Business Cycles (Working Paper 5025). National Bureau of Economic Research. https://doi.org/10.3386/w5025
Boughton, J. M. (2002). On the Origins of the Fleming-Mundell Model (SSRN Scholarly Paper 879833). https://papers.ssrn.com/abstract=879833
Chávez, G. (2024). Acuerdos internacionales y sus beneficios desde el ámbito económico. De primera mano. https://www.facebook.com/fmlapaz96.7/videos/1117353772678108
Clemente, J, Montanés, A. y Reyes, M. (1998). Testing for a unit root in variables with a double change in the mean. Economics Letters, 59(2), 175-182. http://dx.doi.org/10.1016/S0165-1765(98)00052-4
Corsetti, G. y Müller, G. J. (2006). Twin deficits: Squaring theory, evidence and common sense. Economic Policy, 21(48), 598-638.
Dos Santos, C. y Macedo e Silva, C. (2010). Revisiting “New Cambridge”: The Three Financial Balances in a General Stock-flow Consistent Applied Modeling Strategy (Working Paper 594) Levy Economics Institute.
El-Khishin, S. y El-Saeed, J. (2021). The Twin Deficit Hypothesis in the MENA Region: Do Geopolitics Matter? Economies, 9(3), 124.
Godley, W. y Lavoie, M. (2012). A More Advanced Open Economy Model. En W. Godley y M. Lavoie (eds.), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth (pp. 445-492). Palgrave Macmillan, UK.
Gonzáles, R. y Molina, J.M. (2017). Sobre la graduación de la prociclicidad fiscal: el caso de Bolivia. Revista latinoamericana de desarrollo económico, 14(27), 39-56. https://doi.org/10.35319/lajed.20162751
Hassan, M.S., Wajid, A., Mahmood, H. y Shahbaz, M. (2015). Testing Relevance of Twin Deficit for a Transition Economy Like Pakistan. Transylvanian Review of Administrative Sciences, 11(46), 91-106.
Jemio, L.C. (2019). El sector fiscal durante el ciclo económico. En G. Dufner, B.C. Muriel e I. Velásquez (eds.), Evaluación de la economía y del desarrollo en Bolivia: Avances, retrocesos y perspectivas (pp. 73-92). Fundación Konrad Adenauer Stiftung (KAS) y Fundación INESAD.
---------- (2023). La caída de las RIN en Bolivia durante el periodo 2015-2022. En L. C. Jemio y J. A. Morales (eds.), 2023: Riesgos de crisis cambiaria (pp. 11-62). Fundación Vicente Pazos Kanki.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2), 231-254. https://doi.org/10.1016/0165-1889(88)90041-3
---------- (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551–1580.
---------- (1995). Likelihood-based inference in cointegrated vector autoregressive models. Oxford University Press.
Johansen, S., y Schaumburg, E. (1998). Likelihood analysis of seasonal cointegration. Journal of Econometrics, 88(2), 301–339.
Johansen, S. y Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration–With Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210.
Kim, C.-H. y Kim, D. (2006). Does Korea have twin deficits? Applied Economics Letters, 13(10), 675-680.
Kim, S., & Roubini, N. (2008). Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S. Journal of International Economics, 74(2), 362-383.
Lanteri, L.N. (2015). Términos del intercambio y desequilibrios gemelos: evidencia para Argentina. Revista Latinoamericana de Desarrollo Económico, 13(23), 9-26.
Lütkepohl, H. (2005a). Estimation of Vector Error Correction Models. En H. Lütkepohl (ed.), New Introduction to Multiple Time Series Analysis (pp. 269-324). Springer.
---------- (2005b). Specification of VECMs. En H. Lütkepohl (ed.), New Introduction to Multiple Time Series Analysis (pp. 325-352). Springer.
Machicado, C.G. (2018). De las causas próximas a las causas profundas del crecimiento económico de Bolivia entre 1950 y 2015. Development Research Working Paper Series N°9. Institute for Advanced Development Studies (INESAD), La Paz
Magazzino, C. (2012). The Twin Deficits phenomenon: Evidence from Italy. Journal of Economic Cooperation and Development, 33(3), 65-80.
Mankiw, N. G. (2014). Macroeconomía. Barcelona: Antoni Bosch.
Medinaceli, M. (2021). Breve análisis y prospectiva de la industria del gas natural boliviano: 1980-2021. Revista Latinoamericana de Desarrollo Económico, 19(36), 169-226.
Mehta, D. y Mallikarjun, M. (2023). Impact of fiscal deficit and trade openness on current account deficit in India: New evidence on twin deficits hypothesis. Economics, 24(2), 172-188.
Murshed, M. y Nijhum, N.K. (2019). The Fiscal and Current Account Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh. MPRA Paper 97115, University Library of Munich, Germany.
Ncanywa, T. y Letsoalo, T.E. (2019). Which among twin deficits hypothesis, twin divergence, and Ricardian’s equivalence hold in a developing country? Journal of Public Affairs, 19(1)e1904.
Nikiforos, M., Carvalho, L. y Schoder, C. (2015). “Twin deficits” in Greece: In search of causality. Journal of Post Keynesian Economics, 38(2), 302-330.
Nkoro, E. y Uko, A.K. (2016). Autoregressive Distributed Lag (ARDL) cointegration technique: Application and interpretation. Journal of Statistical and Econometric Methods, 5(4), 1-3.
Ouliaris, S., Pagan, A. y Restrepo, J. (2018). Quantitative Macroeconomic Modeling with Structural Vector Autoregressions. Eviews press.
Panousis, K.P. y Koukouritakis, M. (2020). Twin Deficits: Evidence from Portugal, Italy, Spain and Greece. Intereconomics, 55(5), 332-338.
Park, J.Y. (1992). Canonical Cointegrating Regressions. Econometrica, 60(1), 119-143.
Pantelidis, P., Trachanas, E., Athanasenas, A.L. y Katrakilidis, C. (2009). On the Dynamics of the Greek Twin Deficits: Empirical evidence over the period 1960-2007. International Journal of Business and Economic Sciences Applied Research (IJBESAR), 2(2), 9-32.
Pesaran, M.H. (1997). The Role of Economic Theory in Modelling the Long Run. The Economic Journal, 107(440), 178-191.
Pesaran, M. H. y Shin, Y. (1995). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. Cambridge Working Papers in Economics, N° 9514.
Pesaran, M.H., Shin, Y. y Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
Phillips, P.C.B. y Hansen, B.E. (1990). Statistical Inference in Instrumental Variables Regression with I(1) Processes. The Review of Economic Studies, 57(1), 99-125.
Phillips, P.C.B., Shi, S. y Yu, J. (2015b). Testing for multiple bubbles: Limit theory of realtime detectors. International Economic Review, 56(4), 1079-1134
Puig, J.P. (2015). Multiplicador del gasto público en Bolivia: una primera aproximación. Revista latinoamericana de desarrollo económico, 13(24), 47-78.
Rahman, M. y Mishra, B. (1992). Cointegration of U.S. budget and current account deficits: Twins or strangers? Journal of Economics and Finance, 16(2), 119-127.
Saavedra-Caballero, F. y Villca, A. (2024). Examining the existence of twin deficits in Bolivia. International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-01-2023-0043
Şen, H. y Kaya, A. (2020). Are the Twin or Triple Deficits Hypotheses Applicable to Post-Communist Countries? Panoeconomicus, 67(4), 465-489.
Senadza, B. y Aloryito, G. (2016). The twin deficits hypothesis: Evidence from Ghana. International Journal of Business and Economic Sciences Applied Research, 9(3), 55-62.
Shin, Y. y Pesaran, M.H. (1999). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. En S. Strom (ed.), Econometrics and Economic Theory in the 20th century (pp. 371-413). Cambridge University Press.
Shin, Y. y Schmidt, P. (1992). The KPSS stationarity test as a unit root test. Economics Letters, 38(4), 387-392. https://doi.org/10.1016/0165-1765(92)90023-R
Shin, Y., Yu, B. y Greenwood-Nimmo, M. (2013). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework (SSRN Scholarly Paper 1807745).
Sobrino, C.R. (2013). The twin deficits hypothesis and reverse causality: A short-run analysis of Peru. Journal of Economics, Finance and Administrative Science, 18(34), 9-15.
Summers, L.H. (1988). Tax Policy and International Competitiveness. En International Aspects of Fiscal Policies, NBER Chapters, pp. 349-386.
Tanizaki, H. (2001). Asymptotically Exact Confidence Intervals of Cusum and Cusumsq Tests: A Numerical Derivation Using Simulation Technique. Communications in Statistics - Simulation and Computation, 24(4) 1019-1036. https://doi.org/10.1080/03610919508813291
Toda, H.Y. y Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66(1), 225-250.
UDAPE (1999). Bolivia: evaluación de la economía 1999. Unidad de Análisis de Políticas Sociales y Económicas (UDAPE).
Ugarte, D. (2016). The ciclycality of fiscal policy in Bolivia. Bolivian Economic Research Papers, 1(2), 1-40.
Valdivia Coria, J. y Carlo Santos, J. (2021). Efectos de la inversión pública y privada en el crecimiento económico de Bolivia. Revista de Análisis del Banco Central de Bolivia, 34(1), 55-86.
Vamvoukas, G.A. (1999). The twin deficits phenomenon: Evidence from Greece. Applied Economics, 31(9), 1093-1100. https://doi.org/10.1080/000368499323571
Wheeler, M. (1999). The macroeconomic impacts of government debt: An empirical analysis of the 1980s and 1990s. Atlantic Economic Journal, 27(3), 273-284.
Zubaidi, A., Lau, E. y Khalid, A. (2005). Testing Twin Deficits Hypothesis: Using VARs and Variance Decomposition. Journal of the Asia Pacific Economy, 11(3), 331-354.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Latin American Journal of Economic Development
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
