The Twin Deficits and the New Cambridge Approach: estimating the private expenditure equation for Brazil (2001-2018)

Giuliano Manera Longhi; Adriano José Pereira; Paulo Ricardo Feistel

doi:10.33834/bkr.v10i2.366

Giuliano Manera Longhi Universidade Federal do Rio de Janeiro
Adriano José Pereira Universidade Federal de Santa Maria
Paulo Ricardo Feistel Universidade Federal de Santa Maria

DOI: https://doi.org/10.33834/bkr.v10i2.366

Keywords: Twin deficits hypothesis, New Cambridge approach, Private expenditure estimation

Abstract

The twin deficit hypothesis is a theoretical proposition that seeks to establish the causal relationship between the public budget and the external sector’s balance, the current account balance. Empirical studies try to gauge the causal relationship between the two balances, but the evidence does not form a consensus. This paper provides a critique of the methodology of such estimations, which do not elaborate on empirical, theoretical and methodological arguments to construct the econometric models for estimations. Conversely, we provide an alternative approach based on the modern New Cambridge approach, which does not assume the private sector as constant over time, to estimate a private expenditure equation for Brazil using quarterly data from 2001 to 2018. Results found agree with the critique to not assume the private sector as constant when constructing econometric models for Brazil in attempting to gauge at the causal relationship between the public budget and the current account balance. The private sector expenditure proves statistically significant with the stock of financial assets, stable relationship between private expenditure and private disposable income of the New Cambridge hypothesis, and that the housing sector is important in explaining private expenditure in the long run for Brazil.

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Author Biographies

Adriano José Pereira, Universidade Federal de Santa Maria

Professor Titular do Departamento de Economia e Relações Internacionais da UFSM. Professor Permanente do Programa de Pós-graduação em Relações Internacionais da UFSM (PPGRI/UFSM). Professor Permanente do Programa de Pós-graduação em Economia e Desenvolvimento da UFSM (PPGED/UFSM). Chefe do Departamento de Economia e Relações Internacionais da UFSM (2016-2017). Coordenador do PPGED/UFSM (2017-2021).

Paulo Ricardo Feistel, Universidade Federal de Santa Maria

Possui Graduação em Ciências Econômicas pela Universidade Federal de Santa Maria (1985), Especialização em Processamento de Dados (1989) pela SPEI-PR, Mestrado em Economia pela Universidade Federal de Pernambuco (1997) e Doutorado em Economia pela Universidade Federal de Pernambuco (2006). Atualmente é Professor Titular do Departamento de Economia e Relações Internacionais (DERI) da Universidade Federal de Santa Maria e Professor Permanente do Programa de Pós-graduação em Economia e Desenvolvimento (PPGE&D-UFSM). Tem experiência na área de Economia, com ênfase em Teoria do Comércio Internacional, atuando principalmente nos seguintes temas: comércio internacional-integração regional, vantagens comparativas, heterogeneidade das firmas, comercio internacional e comércio exterior brasileiro.

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