Twin deficits hypothesis: Results of the application of the Granger causality test for Serbia

Petrović, Predrag (2014) Twin deficits hypothesis: Results of the application of the Granger causality test for Serbia. Teme, 38 (4). pp. 1407-1423. ISSN 0353-7919 eISSN 1820-7804

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Abstract

The aim of this paper is to test the twin deficits hypothesis for Serbia in the period Q1 2001–Q4 2013. The research is based on the Granger causality test which is conducted on two VAR model specifications. The first specification includes current account and fiscal deficits, which are stationary processes. In addition to the two variables, the second specification also includes the most probably non-stationary series of gross domestic investments, due to which the LA-VAR approach has been opted for. Furthermore, in case the testing of time series non-stationarity resulted in a wrong conclusion, an additional research has been conducted based on the assumption that fiscal balance is a non-stationary series, and gross domestic investments is a stationary one. The results of econometric analysis in all listed approaches unequivocally negate the presence of Granger causality between the current and fiscal balance in any direction. Therefore, I conclude that the Barro-Ricardo Equivalence is typical for Serbia.

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