Causality tests of budget and current account deficits: Cross-country comparisons

This study attempts to determine the causal relationship between budget and current account deficits as well as the direction of such causality. A selected sample of some developed and developing countries with annual time series data is used and cointegration techniques are applied to bring evidence regarding this important issue. Our results do not support any long-run relationship between the two deficits for developed countries while the data for developing countries do not reject such a relationship. However, our results suggest a causal relationship between the two deficits for most of the sample countries. First version received: November 1996/final version received: September 1998