The twin deficits phenomenon: Evidence from Greece

Abstract

This paper explores the relationship between budget and trade deficits in a small open economy using annual data. The purpose of the paper is to test empirically the validity and rationale of the Keynesian proposition (conventional view) and the Ricardian equivalence hypothesis. The econometric methodology is based on cointegration analysis, error-correction modelling and Granger trivariate causality. The ECM empirical findings suggest that budget deficit has short- and long-run positive and significant causal effects on trade deficit.