High capital inflows and rising vulnerabilities underscore the importance of a comprehensive approach to ensuring stability. Standard balance sheet indicators mask a substantial build-up of exposures to exchange rate, maturity, and rollover risks. Household balance sheet risks originate from currency mismatches owing to credit euroization. The fiscal balance has a strong and significant impact on the current account in Serbia. The model is broadly able to reproduce recent economic and policy developments in Serbia. The analysis indicates that privatization can result in sizable fiscal savings.

Abstract

High capital inflows and rising vulnerabilities underscore the importance of a comprehensive approach to ensuring stability. Standard balance sheet indicators mask a substantial build-up of exposures to exchange rate, maturity, and rollover risks. Household balance sheet risks originate from currency mismatches owing to credit euroization. The fiscal balance has a strong and significant impact on the current account in Serbia. The model is broadly able to reproduce recent economic and policy developments in Serbia. The analysis indicates that privatization can result in sizable fiscal savings.

V. Twin Deficits in Serbia32

Objective: To quantify econometrically the relationship between the fiscal and the current account balances—the so-called “twin deficits” in Serbia.

Main results: The fiscal balance has a strong and significant impact on the current account in Serbia, with elasticity estimates between 0.5 and 1.1. In the baseline estimate, the relationship is found to be one-to-one over two quarters (an increase in the fiscal deficit by 1 percent of GDP raises the current account deficit by 1 percent of GDP). For a panel of SEE countries, however, the twin deficits relationship is more elusive—it is overwhelmed by the impact of investment on the current account.

Policy implications: Because fiscal policy has a strong impact on external balances, fiscal tightening can be expected to reduce the current account deficit in the short run.

65. This chapter explores the relationship between fiscal policy and the external current account in Serbia—the so-called “twin deficits.” By definition, since the current account deficit represents foreign savings into the country, it implies domestic dissavings, either from the public or from the private sectors, or both. Ex post, it is important to understand to what extent the external deficit—and its change—was associated with a government deficit or with private sector dissaving. This can be done using national accounts estimates. It is much more difficult, however, to use such observation from the past in a forward-looking context. Public and private savings-investment balances are the result of a large number of economic interactions, and fiscal policy may affect both of them simultaneously, while also being affected in return. Thus, it may be difficult to disentangle the various channels that, in the end, determine the current account. Nevertheless, in a policy making context, it is essential to be able to assess whether an increase in the government deficit will translate into an external deficit, or whether it will somehow be compensated by an increase in private sector savings (as in the case of full “Ricardian equivalence”), and under what conditions.

66. Our econometric study finds that the fiscal balance has a strong and significant impact on the current account in Serbia with elasticity estimates between 0.5 and 1.1. In the baseline specification, an increase in the fiscal deficit by 1 percent of GDP widens the current account deficit by 0.6 percent of GDP in the same quarter and by 0.5 percent of GDP in the following quarter. The next two sections present a brief overview of the literature and empirical evidence. Section C describes recent current account and fiscal developments in Serbia. Sections D and E present estimation results for Serbia and Eastern and Southeastern European countries, using various econometric approaches. Section F concludes.

A. Brief Overview of the Literature

67. While the accounting of the twin deficits is straightforward, its economics is not. The standard analysis of the relationship between the external current account and fiscal balances starts with national accounts definitions. Indeed, since the current account balance is equal to the national savings-investment balance, for a given private sector savings-investment balance, any increase in the government deficit (or dissaving) is equal to an increase in the current account deficit (or national dissaving). This would imply the so-called “twin deficits.” However, moving from ex post accounting to economics, there is reason to believe that the government’s policy actions would trigger changes in economic variables that may affect private sector economic decisions, through multiple channels (see below). These, in turn, may also affect fiscal variables.

68. In most countries, twin deficits are not observed at all times. The U.S., for example, has experienced episodes of twin deficits in the first half of the 1980s, and again since the early 2000s. But in between, current account and fiscal balances went in opposite directions, illustrating a case of “twin divergence.”

69. While the direct effect of fiscal policy is to increase domestic demand and, thus, to widen the current account deficit, this direct effect can be either mitigated or amplified through various channels. 33

  • In an intertemporal setting, the classic “Ricardian equivalence” (between government debt and taxes) effect posits that a higher deficit may simultaneously induce higher private sector savings, as agents anticipate the higher taxes needed in the future to return to fiscal sustainability. If full Ricardian equivalence holds, this effect fully compensates the fiscal expansion through reduced private demand.34 Generally, Ricardian equivalence is thought to be larger the more developed financial markets are, and the less agents are liquidity-constrained. This makes it more relevant for advanced rather than developing countries.

  • Full Ricardian offset is also more likely if the fiscal policy change is believed to be permanent, as households definitely anticipate the higher taxes in the future, whereas a temporary fiscal policy change need not lead to any significant adjustment on a long-term horizon.35

  • In addition, households may decide to respond to a fiscal expansion by increasing their labor supply, so as to increase their income (either because of lower taxes, or to pay for the anticipated fiscal adjustment). This, by increasing productivity, may foster private investment, thereby amplifying the initial fiscal policy effect.

  • Another channel is through the real exchange rate: in a simple macro model, a fiscal expansion typically tends to appreciate the currency, thereby reducing net exports and generating an external deficit. But if the fiscal expansion also induces a rise in interest rates, this will reduce private investment (and, possibly, increase savings). However, if the fiscal policy leads to persistent real appreciation, the higher domestic returns on investment may boost investment. The final impact of these opposite effects on domestic demand and the external balance will depend on their relative strength.

70. Output fluctuations, due to business cycles or productivity shocks, can also explain much of the divergence between external and fiscal balances. 36 During a period of output growth (in the context of a business cycle or a productivity shock), one would expect a deterioration in the current account because of the high imports typically associated with increased investment outpacing savings. But simultaneously, the higher output is expected to improve the fiscal balance through higher tax receipts. Hence, the possibility of a “twin divergence.”

B. The Empirical Evidence

71. The empirical evidence of the twin deficits is mixed (see Appendix for a summary of studies). Finding empirical evidence has proven elusive, since many factors other than fiscal policy play a significant role in determining the current account, and fiscal policy itself is in part endogenous. Thus, unsurprisingly, the few available studies reach different conclusions—both on the sign and the magnitude of the relationship. These studies use a wide variety of methods, from calibrated models to econometric analysis, for various periods and countries.

  • General equilibrium models generally find a twin deficit relation—but a small one. The twin deficits arise because the models generally assume that the increase in labor supply resulting from the fiscal expansion raises the productivity of capital and hence, investment which, by raising demand, causes the current account to deteriorate. To a large extent, the presence and magnitude of the twin deficit relationship depends on the specific structure and calibration of the models—for example, the presence of non-Ricardian households (liquidity constrained or with finite life horizons).

  • Econometric analysis using VAR techniques find varying results. These models generally identify fiscal shocks and trace their impact on the current account, controlling for sources of endogenous fiscal variations due to changes in output.

  • Panel data analyses generally find a positive but small twin deficit relationship. These studies estimate large cross-country panels of the determinants of the current account, based on various theoretical foundations.

  • Time-series single-equation estimates generally find evidence of a twin deficit relationship, but its magnitudes varies depending on the method used.

72. The various empirical programs all have their advantages and drawbacks—which helps explain the wide range of results. Single equation estimates may not be able to disentangle the endogeneities involved, i.e., the Ricardian effects that are precisely at the core of the matter. In particular, it is far from assured that all the exogenous variables explaining trade or current account balances are independent from each other (simultaneity, multicollinearity). For example, the fiscal deficit and government consumption are not independent variables. Or fiscal policy may affect private sector credit demand through various channels, and these effects could possibly offset fiscal policy’s direct impact on the current account. To some extent, however, generalized method of moments (GMM) techniques can overcome the endogeneity problem. Panel data estimates are subject to the same limitations, although the use of instrumental variables may help. Dynamic general equilibrium models may produce results that merely reflect their underlying assumptions, e.g., to what extent households have non-Ricardian characteristics. VAR analyses require long time series to yield reliable results, and remain subject to uncertainty regarding their economic interpretation.

73. An addition issue is that most empirical studies focus on medium- to long-term relationships. They exclude important short-term determinants of current account balances, such as capital account developments (financing constraints, large changes in capital flows, or financial crisis) or terms-of-trade shocks, which may be essential in the case of emerging countries like Serbia.

74. Any econometric analysis faces significant limitations in Serbia due to the short time series available. Reliable statistics are only available since around 2000, which also coincides with a structural break—the beginning of the political transition and the reintegration in the international community. Thus, single equations estimated on an annual basis have too short a time span to yield robust results. This limitation may, to some extent, be overcome with the use of quarterly data, but such dataset is limited in the case of Serbia and it remains uncertain whether the available time frame is sufficient to conduct meaningful VAR analysis. Panel data analysis, by adding the information of other countries, may be more successful in a context of short time series, but results will only be valid in aggregate for the countries involved, and may not be directly applicable to Serbia itself.

75. Against this background, and given data limitations in Serbia, we will explore a limited number of avenues. First, we will estimate single equations on quarterly observations as in Kanda (2006) for the current account. Because of the short time series available, only a quarterly frequency produces enough observations for a single equation. Second, we will estimate current account equations on annual panel data for several Southeastern European countries as in Bartolini and Lahiri (2006) and Bussiere, Fratzscher, and Muller (2004). The large number of countries allows the use of annual data, although results will be valid for the sample as a whole and not specifically for Serbia. These approaches are the only practical ones given data limitations.

C. Current Account and Savings-Investment Balances in Serbia

76. Casual observation of Serbian data suggests the main driver of current account deficits is the nongovernment sector. The level and change in the current account are both strongly correlated with the non-government (i.e., the private sector and public enterprises)37 savings-investment balance (with correlation coefficients of 0.8 and 0.5, respectively, Table 1 and Figure 1).

Table 1.

Serbia: Current Account, Fiscal, and Non-Government Balances, 2000-06

(In percent of GDP)

article image
Source: Serbian authorities, and IMF Staff Reports.

Adjusted, in 2004 and 2005, for the introduction of the VAT in 2005.

Figure 1.
Figure 1.

Serbia: Current Account, Fiscal, and Non-Government Balances, 2000–06

(In percent of GDP

Citation: IMF Staff Country Reports 2008, 055; 10.5089/9781451834901.002.A005

Sources: Serbian authorities, and IMF Staff Reports.

At the same time, changes in the fiscal balance are also positively correlated with changes in the fiscal balance (with a correlation coefficient of 0.35). In 5 out of 7 years, the current account responded in the expected direction to changes in the fiscal stance (Figure 2).

Figure 2.
Figure 2.

Serbia: Changes in Fiscal and External Current Account Balances, 2000–06

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 055; 10.5089/9781451834901.002.A005

Sources: Serbian authorities, and IMF Staff Reports.

77. However, identifying the twin deficits relationship requires isolating the impact of the fiscal from other developments. The rapid growth in private demand, fueled by credit growth, has contributed significantly to widening current account deficits in Serbia, in addition to fiscal developments. Real exchange rate developments and terms of trade shocks also had an impact. Econometric analysis is therefore needed to separate the fiscal impact from other effects.

D. Single-Equation Estimates for Serbia

78. We estimate the relationship between the current account and various plausible determinants, including fiscal variables. The current account or the trade balance depend on domestic growth, terms of trade, the real effective exchange rate (REER), and domestic demand—represented by the fiscal balance and credit to nongovernment. This setup loosely follows Kanda (2006). We estimate a simple OLS equation using quarterly data for Serbia from 2000Q1 to 2007Q3, with all variables, except terms of trade and the REER, expressed in percent of nominal quarterly GDP.38 39 The estimations are performed starting with several lags for each variable, eliminating the insignificant ones in turn, and keeping only the significant variables or those that improve the explanatory power of the regression. 40

79. The impact of fiscal variables on the current account is found to be large and significant (Table 2). The short-term elasticity of the current account to the fiscal balance is estimated at about 0.6 in the same quarter and another 0.5 in the following quarter (i.e., an increase in the fiscal deficit by 1 percentage point of GDP widens the current account deficit by about 1.1 percent of GDP after two quarters) (Equation 1).41 Decomposing government expenditure and revenue, the elasticity of the current account to government expenditure is large (about –1) and acts over three quarters (-0.38, –0.26, and –0.38), with an increase in expenditure reducing the current account balance. Government revenue also has a strong impact (about 0.5) after two quarters.

Table 2.

Serbia: Fiscal Policy and the Current Account, 2000-07

article image
Source: IMF Staff calculations.Notes: OLS estimation. Sample 2000Q1-2007Q3. Variables in percent of quarterly GDP, except REER and terms of trade. Current account excluding grants, corrected for the VAT introduction in January 2005. The symbols ***, **, and * denote significance at 1, 5, and 10 percent. Standard deviations are in parenthesis.Specification (2) includes amortization of FFCDs as expenditure, and nonbank external borrowing as credit.

80. Other variables such as domestic credit, economic activity, terms of trade, and the real effective exchange rate, also have a significant impact on the current account. Credit to nongovernment is found to affect negatively the current account over several quarters, with an elasticity between –0.8 to –1.3. Economic growth first has a negative impact on the current account (due to higher demand and lower savings) but later on has a positive impact (due to higher net exports and savings). Real appreciation is associated with a deterioration in the current account balance, as expected. The impact of terms of trade is less clear: in one specification an improvement in terms of trade benefits the current account (after a lag), while in the other, the immediate improvement is followed by a deterioration, possibly due to increased demand.

E. Panel Data Estimates for European Countries

81. The current account in Eastern European countries experiencing economic transition is likely to be driven by more factors than fiscal variables—for example investment. The transformation and convergence process of the transition economies was associated with large and persistent current account deficits, led in part by high investment and consumption. In this context, the fiscal stance may be insignificant—although one would expect it to have some impact at the margin.42

82. We test for the presence of a twin deficit relationship in Eastern and Southeastern Europe (ESEE) in transition. We reproduce the study by Bartolini and Lahiri (2006), based on Bernheim (1987), with annual data for 15 Eastern and Southeastern European countries over the period 1995–2006.43 This involves two steps. First, an analysis of the response of private consumption to changes in the fiscal balance, so as to assess the degree to which Ricardian effects may compensate for the direct expansionary impact of, say, an increase in the fiscal deficit. The model specification controls for public consumption (because the latter may be a substitute for private consumption), public debt (because high debt may increase private savings), economic and population growth (because these variables are traditionally associated with consumption behavior). Second, an estimate of the response of the current account to changes in the fiscal balance, using the same variables. By using the same specification, one sees whether investment responds to changes in fiscal policy, or whether changes in private consumption translate directly into changes in the current account.

83. Results do not suggest the presence of twin deficit relationships in ESEE countries (Table 3). In the baseline specification with fixed effects, an increase in the deficit (without change in public consumption, i.e., through a tax cut) reduces private consumption and improves the current account balance (by 0.18), which suggests a “twin divergence” with completely Ricardian agents (Column 2). However, an increase in public consumption (financed by an increase in taxes) reduces private consumption and worsens the current account (by 0.44). Hence, a deficit-financed increase in public spending would worsen the current account by only 0.26. The behavior of private consumption also suggests strong Ricardian effects, with a tax cut actually reducing private consumption (Column 1). More conventionally, though, public and private consumption seem to be close substitutes.44

Table 3.

Eastern and Southeastern Europe: Fiscal Policy and the Current Account, 2000-07

article image
Source: IMF Staff calculations.Notes: Panel fixed effects estimation. Sample 1995-20062. Data source: IMF WEO database. Variables in percent of GDP or in percent. The symbols ***, **, and * denote significance at 1, 5, and 10 percent. Standard deviations are in parenthesis.

84. However, changing the specification confirms the prominence of investment as the driver of current account developments and uncovers a twin deficits relationship. Introducing the lag of the fiscal balance in the estimation restores a twin deficit relationship in the second year (Column 3). Introducing gross capital formation also suggests a lagged twin deficit relation, and shows investment as a strong and significant determinant of the current account deficit (Column 4). Controlling for other short-term shocks to the current account, such as terms-of-trade shocks, does not affect results significantly.

F. Conclusions

85. We find that the fiscal balance has a strong and significant impact on the current account in Serbia, controlling for other macroeconomic variables, including bank credit, growth, the real exchange rate, and terms of trade. The impact is found to be large and significant, with elasticity estimates between 0.5 and 1.1. In the baseline specification, an increase in the fiscal deficit by 1 percent of GDP widens the current account deficit by 0.6 percent of GDP in the same quarter and by 0.5 percent of GDP in the following quarter. Decomposing between government revenue and expenditure, the former acts with a two-quarter lag, while the latter acts both immediately and with lags. Bank credit is also found to have a significant (negative) impact on the current account.

86. On the other hand, evidence of a twin deficits relationship is more elusive for a panel of Eastern and Southeastern European countries. This may reflect, during the transition process, strong Ricardian effects (fiscal consolidation allowing economic agents to reduce their savings) and the overwhelming effect of domestic investment in causing large and persistent current account deficits (as shown, for example, in Teferra and Mottu, 2006). Country studies may help assess specific circumstances explaining the weak twin deficits relationship in the region.

87. The limitations of the empirical results should be noted. First, the data series are relatively short for Serbia, making any econometric estimate far from robust. Second, different specifications of the key variables yield results that are quite different in size, if not in direction. Third, it is far from assured that all the exogenous variables explaining trade or current account balances are independent from each other (multicollinearity). In other words, fiscal policy, for example, may affect private sector credit demand. Thus, the results should be interpreted with the appropriate caution, especially for forecasting and policymaking purposes.

Appendix: Summary of Empirical Studies

General equilibrium models

  • Baxter (1995), using a DGE-real business cycle model calibrated for the U.S., finds that a persistent change in the fiscal stance (through changes in either government expenditure or taxes) has a 0.5 elasticity on the current account. A tax cut that is only temporary has little effect, because its effect on investment is minimal—the tax cut will be phased out once the capital is in place.

  • Erceg, Guerrieri, and Gust (2005), using a DGE model calibrated for the U.S. and assuming that some households are non-Ricardian, find that a increase in the fiscal deficit (either through expenditure or taxes) generates a trade deficit with an elasticity of less than 0.2. This low value is mainly due to low price elasticities of export and import demand—thus, the real appreciation that follows the fiscal expansion does not induce a strong shift in net exports.

  • Kumhof and Laxton (2007), using a DGE model for the U.S., find that the current account reacts with an elasticity of about 0.6-1 to a permanent fiscal shock after about 5 years. Their model incorporates more significant non-Ricardian features, which explains the relatively high estimates.

  • Finally, Cavallo (2005b), also using a DGE model calibrated for the U.S., finds that the composition of government expenditure matters for its impact on the current account. While the elasticity of the current account to expenditure on final goods is 0.5, its elasticity to expenditure on wages is ten times smaller (only 0.05), since the latter has no direct impact on imports.

VAR estimates

  • Kim and Roubini (2004), using a VAR approach for the U.S. for 1973–2004, find that surprisingly, fiscal expansions are associated with an improvement in the current account, because the drop in investment caused by the rise in interest rates (due to the fiscal expansion) is significant and reinforces the Ricardian effects. See also Muller (2004) for a similar analysis.

  • Corsetti and Muller (2006), expanding the previous approach to 4 large advanced economies between 1980–2004, find that the existence and magnitude of the twin deficits depend on the degree of economic openness and the persistence of the fiscal shocks. The latter effect is because the lasting terms-of-trade appreciation raises the return on investment, causing investment to rise (counteracting the drop in investment due to the rise in interest rates). Hence, in economies rather closed with non-persistent fiscal shocks, such as the U.S. and Australia, the impact of fiscal policy on the current account is rather limited, while it is more significant in countries such as Canada and the U.K.

  • Blanchard and Perotti (2002) and Perotti (2006), apply the same techniques to quantify the impact of fiscal policy on output.

Panel data analyses

  • Bartolini and Lahiri (2006), reproducing a study by Bernheim (1987), use a panel regression technique with fixed effects to estimate the link between fiscal and current account balances, controlling for government consumption, public debt, GDP growth, and population growth. For a group of 26 advanced and emerging countries between 1972–98 and for 18 OECD countries between 1972–2003, they find an elasticity of 0.38 and 0.30, respectively, between the current account and the fiscal balance. Because of the inclusion of government consumption as a control variable, this represents the sensitivity to a change in taxes. A change in government consumption financed by an increase in the fiscal deficit would have a larger effect, 0.71, in the first sample but a small one, 0.07 in the second sample.

  • Bussiere, Fratzscher, and Muller (2004) estimate an intertemporal model of the current account—where consumption is smoothed over time by lending or borrowing abroad—on a panel of advanced OECD and EU accession countries for the periods 1980-2002 and 1995-2002, respectively. Using various dynamic panel estimation methods (fixed effects, instrumental variables, and generalized method of moments), they find that the elasticity of the current account to the fiscal balance is between 0.06 and 0.25, controlling for growth and convergence indicators (relative income, investment, and public spending).

  • Applying a similar setup for Bulgaria and Romania, Duenwald, Gueorguiev, and Schaechter (2005) find the elasticity of the trade balance to the lagged fiscal balance to be 0.2, using quarterly data from 1999–2004. They also find that the elasticity to lagged credit flows is –0.4 for Bulgaria and –0.7 for Romania.

  • In a further study, the same Bussiere, Fratzscher, and Muller (2005) expand the model to include both global and country-specific productivity shocks. Using panel and country-specific regressions for a large sample of OECD countries from 1960–2003, they find an elasticity lower than 0.1 between the current account and the fiscal balance. In this setting, productivity shocks are prominent in the determination of the current account.

  • Funke and Nickel (2006) estimate the impact of government expenditure on imports in advanced economies. Using panel data estimates on annual data from 1970–2002 for the G-7 countries, they find that the elasticity of imports of goods and imports of services with respect to changes in government expenditure is 0.4 and 0.5, respectively—controlling for private consumption, investment, and relative price effects.

  • Finally, in a study that incorporates a large sample of developing countries from 1971–95, Chinn and Prasad (2003), using panel regressions, estimate the long-run elasticity of changes in the current account to changes in the fiscal balance to be about 0.4, while the elasticity in advanced economies is found to be smaller and not significant. This relatively high elasticity for developing countries is consistent with the existence of smaller Ricardian effects, possibly due to greater liquidity constraints and less developed financial markets in those countries.

Time-series single-equation estimates

  • Bagnai (2006) estimates a long-run cointegration relation between the current account and the fiscal balance, controlling for private investment, separately for each of 22 OECD countries over the period 1960–2005. The identification of structural breaks improves the statistical significance of the results. The presence of a twin deficit relationship is ruled out in half of the countries while for the other half, the long-run elasticity between the current account and the fiscal balance is 0.4 on average.

  • Kanda (2006) estimates the determinants of the trade balance in Bosnia and Herzegovina using the generalized method of moments on quarterly data for 1998–2005 and finds the expected relationships to be relatively large and significant. The elasticity of the trade balance to fiscal expenditure and fiscal revenue (lagged two quarters) is estimated at –0.45 and 0.39, respectively. Other determinants of the trade balance, credit flows to enterprises and to households, have an elasticity of –0.21 and –1.08, respectively.

  • Finally, Obstfeld and Rogoff (1996, p. 144) estimate a simple cross-country equation relating the current account and the fiscal balance of 19 OECD countries (on average over 1981–86). They find a large and significant coefficient of 0.78, but warn that such unsophisticated approach should not be given too much weight, as it omits important variables that affect the current account.

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32

Prepared by Eric Mottu (EUR). Useful comments were received from Peter Doyle and from participants in a November 2007 Seminar at the National Bank of Serbia.

33

See, for example, Baxter (1995), Cavallo (2005a), Corsetti and Müller (2006), Kim and Roubini (2004), Obsfeld and Rogoff (1998).

35

This is confirmed empirically by Ahmed (1986) for the U.K. between 1908–1980, a period that includes two large but temporary expenditure shocks due to wars.

37

Because national account data only allow a distinction between the general government and the other sectors, state- and socially owned enterprises are part of the nongovernment sector

38

We do not follow Kanda (2006) in using GMM estimates because of the lack of available well-founded instruments independent of the variables in play, acknowledging the associated statistical caveats.

39

Unit root tests (augmented Dickey-Fuller) suggest absence of unit roots for all variables.

40

The source for these series is IMF staff, based on official data. A second, broader, definition of the fiscal balance and credit to nongovernment (Table 2, Equation 2) includes amortization of frozen foreign currency deposits (FFCDs) as expenditure and nonbank external borrowing as credit, respectively.

41

Using the second definition of variables (Equation 2), the elasticity is smaller but remains at a high 0.5, and the effect is only contemporaneous. The smaller fiscal impact may result from a smaller effect of the amortization of FFCDs on demand than other components of public expenditure.

42

Teferra and Mottu (2006) show that the large current accounts in Eastern European countries were associated with high investment. See also McGettigan (2000).

43

The countries are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Macedonia, Moldova, Romania, Serbia, Slovak Republic, Slovenia, Poland, Ukraine, and Turkey.

44

Unit root tests suggest the absence of unit roots. The Hausman specification test supports the fixed effects specification against random effects.

Republic of Serbia: Selected Issues
Author: International Monetary Fund