It is also of immense help in providing an insight and knowledge to the general public, policy makers and economic planners on the analysis of twin deficit and manufacturing sector of nigerian economy. To evaluate this claim, decompose total national saving s into two parts. In contrast to the conventional twin deficit hypothesis between the current account, which comprises many items out of governments scope of maneuvering, and the budget deficit, we track the causal link between egypts merchandise trade deficit and the budget deficit. Twin deficits hypothesis, budget deficit, current account deficit. Therefore, policy to curb chronic current account deficit cannot be achieved if the policy markers simply rely on curtailing budget deficit. Twin deficits, twenty years later federal reserve bank of. The first model that analyses the link between budget deficit and current account deficit is the mundell fleming model, which supports the twin deficits hypothesis. Table 1 basics of twin deficits hypothesis twin deficits. Meanwhile the twin deficit hypothesis is defined as a positive longrun relationship between the current account and fiscal balance. All else equal an increase in the government deficit causes an increase in the current account deficit.
Hence this article is a revisit to the existing debate to see whether fiscal deficit and current account deficit can be called as twin deficits pertaining mainly to indian economy. The empirical tests from the study fail to reject the twin deficit hypothesis, indicating that rising budget deficits put more strain on the current account deficits in tanzania. The paper tests the validity of the twin deficits hypothesis, using annual time series data for the 19662015 period. First, we found causality run from budget deficit to current account deficit keynesian paradigm for thailand and bidirectional causality for malaysia. Anatoliy voychak director of the christian university theoretical considerations of the twin deficit hypothesis are applied to investigate budget deficit and current account deficit phenomenon in ukraine. This paper investigates the twin deficit hypothesis for ghana in view of the persistent comovement between the budget deficit bd and current account deficit.
A crosscountry test of ricardian equivalence and the twin. In this paper we utilize time series data to evaluate the impact of. We employ a new approach to the twin deficit hypothesis aimed at enhancing policy making in egypt. The results on the twin deficits hypothesis, using the ardl method indicates the occurrence of a positive relationship between budget deficit and the longterm current account deficit, while a negative correlation was observed in the short term assessment. Twindeficits dynamic effects of balancing the budget on. In this way, we hope to add to existing literature on the host subject. The purpose of this paper is to test the twin deficit hypothesis and empirical relationship between current account balance and budget deficit while including other important macroeconomic. Twin deficit hypothesis some economists believe a large budget deficit is correlated to a large current account deficit.
However, there is no identical perception on the relationship between fiscal deficit and current account deficit both theoretically and empirically. Therefore, this paper reached to a conclusion that the twin deficit hypothesis was not confirmed for the kuwaiti case. Twin deficits hypothesis as an indication of government. Acaravci and ozturk 2008 rejected the ricardian equivalence hypothesis by supporting the keynesian view that there is a longrun relationship between both budget and current account deficits. The term twin deficits in economics refers to a countrys domestic budget and foreign trade financial situation. This view is consistent with the mundellfleming model under perfect capital mobility and floating exchange rates.
How strong is the evidence for the twin deficit hypothesis, and the theoretical case for it. The twin deficits hypothesis asserts that a reduction in the budget deficit causes a reduction in the trade deficit. Definition of twin deficits in economics bizfluent. The twin deficit hypothesis is tested empirically by employing cointegration and grangercausality tests. Thus, the main thrust of the twin deficit hypothesis, however, is that current account deficits of most countries is caused by governments budget deficits phenomenon and the most suitable way to solve this problem and stabilize internal and external deficits is reducing the governments budget deficit zamanzadeh and mehrara, 2011.
The twin deficits hypothesis in developing countries international. In this paper we utilize time series data to evaluate the impact of structural breaks on the long. Ricardian equivalence, twin deficits jel classifications. Second, on the whole, budget deficit is the driving force for interest rate. Bluedorn1 daniel leigh1 1research department international monetary fund euiimf fiscal policy conference, 67 june 2011. The view claiming the fact that there is a positive relationship between these two deficits is called twin deficit hypothesis. What forces drive international trade, finance, and the. Standard macroeconomic theory points to how a budget deficit can be a contributing factor to a current account. Higher and persistent level of fiscal deficit and current account deficit is the. This paper analyses the twin deficits hypothesis in india covering the period april, 199495 to july, 2014. In macroeconomics, the twin deficits hypothesis or the twin deficits phenomenon, is the proposition that there is a strong causal link between a nations government budget balance and its current account balance. The empirical model is estimated for the g7 countries during the period between 1994 and 2011. Aug 20, 2019 twin deficit hypothesis and reverse causality. In addition to applications with people of color, the deficit hypothesis may form the basis for some counseling research and practice with other nondominant groups e.
In recent years, the turkish economy has been characterized by soaring budget deficits and deteriorating trade balances. Current account deficit, budget deficit and saving gap. The paper empirically examines the relationship between fiscal deficit and current account deficit in india for the period from 19701971 to 202014. The effects of a twin deficit can be detrimental, as each deficit can feed off the. This study aims to test the validity of the twin deficits hypothesis for turkey using the quarterly data from 1988q1 to 2005q2.
This assertion has been the subject of debate in the scholarly and policy front. The role of other factors, like investment or the exchange rate, is also analyzed. To identify the relationship between the two timeseries, cointegration and granger causality tests are employed. This research considers the rare utility of ardl method in assessing twin deficits hypothesis, long and shortterm relationships between budget and current account deficit. The term became popular in the 1980s and 1990s in the united states when the country underwent a deficit in both areas. Deficit hypothesis applications to other nondominant groups. This study aims to analyze the relationship between the current account and budget deficit twin deficits hypothesis, measuring the account performance and other macroeconomic indicators in predicting the debt crisis in indonesia. Investigation showed that budget deficit and current account deficit are cointegrated and a. Trachanas and katrakilidis 20 put forward the twin deficit hypothesis which has proven its efficiency in spain, greece, ireland and portugal. International macroeconomics, chapter 7 schmittgroh. The twin deficit hypothesis in egypt sciencedirect. Fidrmuc 2003 tested both hypotheses for 12 oecd countries during 19702001 and concluded that the twin deficits and feldsteinhorioka hypotheses existed only in the case of hungary and poland. The purpose of this study is to determine the validity of the triplet deficit hypothesis, which means the savings gap and budget deficit effect on the current account deficit. There exists an argument that higher fiscal deficit is the major factor behin.
Twin deficits, twenty years later leonardo bartolini and amartya lahiri recent declines in the u. This paper illustrates a longterm causal relationship from the current account balance to the budget balance. The results support the validity of twin deficits hypothesis in india, both in the. The logic behind it is that tax cuts which increase the deficit and reduce revenues result in increased consumption. Structural breaks and the twin deficits hypothesis springerlink. In other words, even commitment to balancing the budget does not render the twin deficit hypothesis relevant. Mundell, 1963, which asserts that an increase in budget deficit will cause an upward shift in interest rate and. Is the twin or triplet deficit hypothesis valid in g7 countries. The e ect of fiscal consolidation on the current account john c. Of course, should causality be at least in part from current account deficit to budget deficit, as hypothesis 2 contends.
Volume 12, number 7 october 2006 federal reserve bank of new. In order to fulfil the objectives, the paper starts with a descriptive. Recent twin deficit experience of ukraine is described. The twin deficits hypothesis is based on the mundellfleming model fleming, 1962. Historically, the twin deficit hypothesis evolved from early studies tackling the socalled dualgap analysis. This would imply virtually total control over the domestic economy if the twin deficit hypothesis were true, balanced or surplus budgets would guarantee external and internal equilibrium. The second type of models establishes that a none of the three aforementioned countries validates the twin deficit in the long term, and b only canada is close to validating the twin deficit hypothesis in the short term. In order to fulfil the objectives, the paper starts with a descriptive statistics to check the presence of normality in the frequency distribution followed. The relationship between current account and budget. According to this hypothesis, fiscal shocks which cause a deterioration of the governments budget also worsen a countrys current account balance. The paper is thought to be significant because the concept of the twin deficit. Analysis of twin deficits hypothesis in indonesia and its. This article aims to analyze the twin deficit hypothesis in the republic of congo from 198020.
An empirical investigation for the twin deficits hypothesis in pakistan 65 budget and current account deficits as one in which the former causes the latter in the united states. Chinn and ito 2007 described there is significantly positive linkage among ca and government budget balance. Its methodology is based on ardl approach to cointegration. To the academia, the findings of the study will contribute to the available literature on twin deficit hypothesis and in nigerian economy. Section ii provides the relevantliterature in the research area. Thus, the empirical results in general reject the validity of the twin deficit hypothesis. Casual observation suggests that the twindeficit hypothesis accurately captures the u. This paper examines the validity of the ricardian equivalence proposition by focusing on the longrun differences in government budget and trade deficits in fifty countries. The twin deficit hypothesis has been called into question since the financial crisis within the euro zone followed by the requirement of the settlement of the austerity of budget policies. Testing twin deficits hypothesis for eu27 and turkey romanian journal of economic forecasting xxi 4 2018 105 must be matched by an equal current account deficit. Twindeficits dynamic effects of balancing the budget. Section 4 tests the twin deficit hypothesis defined as a longrun cointegrating relationship between the current account and the fiscal balance.
In this, he tested the validity of the twin deficit hypothesis using annual time series data for the period 19662015. The autoregressive distributed lag ardl bounds testing approach is employed to analyze the long run and short run relationship between the twin deficits. The findings show that budget deficit and savings gap have important role in. Pdf twin deficit hypothesis has become a popular phenomenon beginning from. The economies presenting both fiscal and current deficits are seen to have twin deficit. Testing the twin deficit hypothesis for kenya 19702012. Jun 29, 2018 the paper empirically examines the relationship between fiscal deficit and current account deficit in india for the period from 19701971 to 202014. Besides, given the importance on free trade, decentralization and development there is a need to understand the association between budget. Twin deficits, twenty years later federal reserve bank. Rethinking the twin deficits munich personal repec archive. Introduction like most developing countries a steady budget deficit in pakistan is the primary cause of all major ills of the economy. Keynesian hypothesis of a positive link from the budget balance to the current account is not valid for. Introduction in recent years, the twindeficit hypothesisthe argument that fiscal deficits fuel current account deficitshas.
In the twin deficit hypothesis, economists relate a large fiscal deficit to a large current account deficit. Purpose this paper investigates the twin deficit hypothesis for ghana in view of the. Testing twin deficits and savinginvestment exus in turkey. Therefore, the amount of supporting literature on the ews method alongside the measurement for model performance of debt crisis is also relatively less in contrast with that. Evidence from pakistan anjum aqeel and mohammed nishat 1. Recent theoretical and empirical analyses of the relation between the current account and the government budget balance suggest that the twin deficits relation is subject to structural changes. Investigation showed that budget deficit and current account deficit are cointegrated and a government budget deficit grangercauses a current account deficit. Estimation results based on this measure of fiscal policy changes suggest that a 1 percent of gdp fiscal consolidation raises the current account balancetogdp ratio by about 0. Garg and prabheesh 2017 investigate the twin deficit for india by using ardl model and confirm the twin deficit hypothesis. Introduction the validity of the twin deficits hypothesis, that a government budget deficit could cause a trade deficit, has been long debated in the economic literature. The twin deficit hypothesis tdh is an economic proposition suggesting that there exists a positive causal association between budget deficit and current account deficit.
A crosscountry test of ricardian equivalence and the twin deficits hypothesis jon nadenichek california state university northridge abstract. Certainly, this hypothesis has been widely applied for many developed and developing countries, however from a literature search, empirical work on studying the twin deficits hypothesis is not available for a. The twin deficits hypothesis says that the current account deficit and the fiscal deficit move together, at least in long run. Economists qualify this as absence of free lunch which means government. On the other hand, the reverse causation as detected in this study tends to suggest some evidence of current account targeting. The twin deficits hypothesis in developing countries. On the other hand the current account deficit varied. The twin deficits hypothesis holds if governments fiscal deficit, through its impact on national saving and consumption, leads to a deterioration of the current account. These developments constitute greece an interesting casestudy in examining the twin deficit hypothesis. The case of pakistan 1972 2008 significant long run effect on current account deficit in pakistan. Structural breaks and the twin deficits hypothesis.
In order to fulfil the objectives, the paper starts with a descriptive statistics to check the presence of normality in the frequency distribution followed by. Mar 26, 2018 twin deficit hypothesis some economists believe a large budget deficit is correlated to a large current account deficit. The fiscal and current account deficits of most countries in subsaharan africa ssa appear relatively large or have been widening over the past several years in the face of positive output growth and steady. The paper tests the validity of the twin deficits hypothesis, using annual time. Besides, given the importance on free trade, decentralization and development there is a. An empirical investigation of twin deficits hypothesis. According to this model an expansionary fiscal shock in an open economy, under a flexible exchange rate regime. This macroeconomic theory is known as the twin deficit hypothesis. This study aims to test the validity of the twin deficits hypothesis for turkey using the. In addition to these theoretical approaches, current account targeting and feedback. However, most of the already existing literature on the tdh has focused on already developed economies.
The case of ukraine by olga vyshnyak chairperson of the supervisory committee. Nov 14, 2006 recent theoretical and empirical analyses of the relation between the current account and the government budget balance suggest that the twin deficits relation is subject to structural changes. The remainder ofthis paper is structured as follows. This invites an inflow of foreign capital in an environment of free. The issue of whether thelong run relationship between fiscal and current account deficits follow the tenets of twin thedeficits hypothesis, the ricardian equivalence twin divergence, and the hypothesis has in recent years become debatable both in the developed and, mainly the developing countries. We empirically investigate this relation for the period 19602007. Moreover, given the emphasis on free trade, decentralization and growth, there is a need to.
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