A reassessment of the twin deficits relationship

Abstract

This article provides new evidence on the relationship between the United States budget and current account deficits. Using a testing procedure advocated by Bierens, both deficits are found to be stationary around a nonlinear deterministic trend and are co-trended insofar as they share a common nonlinear deterministic trend.

Notes

¹ Bierens (2000) considers nonlinear co-trending in the context of inflation and interest rates in the US. Further applications include Camarero and Ordonez (2006) who consider European unemployment rates.

² Estimation is conducted using the EasyReg International software made available by Herman Bierens.

Table 3. NLADF tests

³ Bierens (1997a) reports results for m = 10 and argues there is no definitive method for choosing m. If m is too low, it may be insufficient to approximate the nonlinearity under the alternative. If m is too high, it may cause the test to lack power.

⁴ Approximated as .