Verification of Relationship Between General Government and Current Account Balances: An Example of EU Countries

Abstract

The article focuses on the relationship between the general government balance and the current account of the balance of payments. The aim is to summarize the existing knowledge about the relationship based on the twin deficit theory and to carry out an empirical verification. As part of the analysis, the Granger causality method is first applied to each EU country separately, and then the threshold panel regression method is used. For the subsequent estimation of the threshold panel model, the direction of the relationship from the general government balance to the current account is considered based on the results of Granger causality. Within the panel, the dependence of the balances on the level of the general government debt to GDP is tested. First, the relationship and its strength are verified in all EU countries. Due to the diversity of EU countries, the economies are subsequently aggregated into sub-panels. Threshold values for general government debt affecting the strength of the relationship between balances are different for individual panels and depend, among other things, on the perception of these countries by the financial markets and often also on the (high) indebtedness of the private sector, which usually requires a more drastic fiscal policy response.