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Fiscal and external deficits nexus in GIIPS countries: evidence from parametric and nonparametric causality tests

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journal contribution
posted on 05.10.2021, 11:18 authored by Ahmad Hassan AhmadAhmad Hassan Ahmad, Olalekan Bashir Aworinde
This paper investigates relationship between fiscal and external deficits in five European Union countries: Greece, Ireland, Italy, Portugal, and Spain (GIIPS) using quarterly data for the period 1980:1-2020:1. Literature on the relationship between these series has not only used linear techniques, but generally reported inconclusive results. Nonlinearity relationship has been overlooked even though fiscal policy is likely to exhibit nonlinearity due to its sensitivity to political decisions. To capture this nonlinearity behaviour, nonlinear causality technique is applied here in addition to the usual linear techniques used in the extant literature. The results show that there is evidence of unidirectional nonlinear causality from trade balance to government deficits in Greece and Italy, a nonlinear unidirectional causality from government deficits to trade balance in Portugal. The results also indicate evidence of a nonlinear bi-directional causality between the trade and government balances in Ireland and Spain. The policy implication of these results is that governments of these countries need to address fiscal deficits to manage their trade balances. Policies that will improve the countries’ revenue base, such as tax and labour market reforms as well as capital market reforms to engender productivity and increase competitiveness would be beneficial.

History

School

  • Business and Economics

Department

  • Economics

Published in

International Advances in Economic Research

Volume

27

Pages

171-184

Publisher

Springer

Version

VoR (Version of Record)

Rights holder

© The Authors

Publisher statement

This is an Open Access Article. It is published by Springer under the Creative Commons Attribution 4.0 International Licence (CC BY 4.0). Full details of this licence are available at: https://creativecommons.org/licenses/by/4.0/

Acceptance date

10/08/2021

Publication date

2021-09-28

Copyright date

2021

ISSN

1083-0898

eISSN

1573-966X

Language

en

Depositor

Dr Ahmad Hassan Ahmad. Deposit date: 10 August 2021