Twin deficits phenomenon in small islands: an empirical investigation by panel data analysis

Abstract

This article empirically investigates the direction of causality between current account balance and the overall budget balance of a selected 24 small island state economies by conducting panel data econometric techniques. The results of both bivariate and pairwise Granger causality tests suggest that there is unidirectional causation which runs from current account balance to the overall budget balance. On the other hand, no evidence has been obtained on the causation which runs from budget balance to current account balance in small island states.

Acknowledgements

The authors would like to express their gratitude to Prof. Hasan Ali Bicak, Dean of Faculty of Business and Economics, Eastern Mediterranean University, for his continuous support and guidance. Any errors remaining are their sole responsibility.

Notes

¹ See Kaminarides and Nisan (1993).

² See Cole (1993).

³ See Briguglio (1993).

⁴ See Caram (1993).

⁵Selwyn (1980) argues explicitly that there is no need to classify islands in a separate group since this is not useful for the purpose of analysis and prescriptions. He emphasizes that many of the characteristics of small states also belong to the characteristics of small islands.

⁶ Around one million population requirement was set to identify the small countries in Commonwealth Secretariat's conference initiated in 1977 in Barbados.