Twin Deficits or Ricardian Equivalence? Empirical Evidence in the APEC Countries

Abstract

The paper analyses the relationship between trade balance and government budget for the APEC countries over the 1980-2013 years. Using a panel data techniques, a 2-variable VAR is estimated. Empirical findings show that for the whole APEC members as well as for the ASEAN sub-sample a bi-directional causality is discovered, while for the American sub-sample the Neo-classical view holds. Moreover, the forecast errors decompositions seem confirm this analysis. Cointegration tests reveal the existence of a long-run relationship between these two variables, with most of the coefficients close to 1, although several ASEAN countries represent exceptions. Finally, causality analyses show that ten countries exhibit the absence of any causal relationship, in line with neutrality Ricardian hypothesis.