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An Empirical Analysis of the Nexus between Investment, Fiscal Balances and Current Account Balances in Greece, Portugal and Spain

Pilbeam, K. and Litsios, I. (2015). An Empirical Analysis of the Nexus between Investment, Fiscal Balances and Current Account Balances in Greece, Portugal and Spain (Report No. 15/18). London, UK: Department of Economics, City University London.

Abstract

We provide new evidence that current account balances in Greece, Portugal and Spain have become non-stationary after the adoption of the euro implying that there is no long-run stable relationship between savings and investment contrary to the Feldstein-Horioka puzzle. This can be taken as evidence of unsustainable current account balances and loss of solvency for the underlying economies. Using the ARDL methodology we also report a statistical association between fiscal balances and current account balances which implies that fiscal austerity can help these economies to reduce their current account deficits and restore their competitiveness. Our empirical evidence also suggests a particularly strong significant negative association between domestic investment and current account deficits. The magnitude of this latter effect may have important policy implications concerning the ways in which investment is financed to improve external competitiveness.

Publication Type: Monograph (Discussion Paper)
Additional Information: Copyright 2015, the authors
Publisher Keywords: International Financial Integration, Twin deficits, Feldstein-Horioka, ARDL co-integration
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics
School of Arts & Social Sciences > Economics > Discussion Paper Series
URI: http://openaccess.city.ac.uk/id/eprint/14074
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