Abstract
Background
An econometric analysis of the twin deficit hypothesis is of special importance for the Republic of North Macedonia in view of its perspective membership in the European Union and from the point of view of its macroeconomic stability in the long run.
Objectives
The objective of this paper is to test empirically the validity of the twin deficit hypothesis in the Republic of North Macedonia.
Methods/Approach
To achieve this objective, we used actual quarterly data on Macedonia's budget and the current account deficit in the period from the first quarter of 2005 until the fourth quarter of 2017 and applied several econometrics methods: the Granger causality, a vector autoregressive (VAR) and a vector error correction model (VECM).
Results
These findings point to the conclusion that efforts focused on improving the current account imbalances through fiscal policy will be inefficient in the short run.
Conclusions
However, the existence of a long run relationship between the budget deficit and the current account deficit indicates the necessity of policy initiatives focused not only on reducing the budget deficit, but also on improving the external position of the country though export promotion.