Empirical analysis of the twin deficits hypothesis in the republic of North Macedonia

Abstract

The twin deficits hypothesis is widely considered one of the most frequently employed phenomena in the economic literature. An econometric analysis of the twin deficit hypothesis is of special importance in understanding the perspective on macroeconomic stability in the Republic of North Macedonia. This paper aims to empirically test the validity of this hypothesis in the Republic of North Macedonia. To do so, we utilized quarterly data on Macedonia’s budget deficit, the current account deficit, exchange rate, interest rate, GDP, government expenditure, and money supply, starting from the first quarter of 2001 to the fourth quarter of 2022. Through the application of the ARDL model, the study found that between the variables taken into analysis, there exists a short and long-run relationship. More specifically exchange rate, government expenditure, and GDP result in improvement on the budget deficit, both in the short run and long run. While current account deficit, interest rate, and money supply result in worsening the budget deficit, both in the short run and long run.