grew from % of GDP to over 3%, while the trade deficit increased from 1% to %(l). This episode lead many economists to believe in a one-to-one relationship between the US trade and fiscal deficits, the so called "twin deficit" behavior. Ths "twin deficit" hypothesis is supported by the traditional Mun- dell Fleming model 22/02/ · Do Concerns about US Twin Deficits Justify the Dollar's Increasingly Bearish Outlook?. As the US government looks to raise $ billion in Treasury auctions this week, the risk from a ballooning Implications of Twin Deficits We extend the analysis to examine the marginal impacts of twin deficits after controlling for the effects of budget deficits and current account deficits
Twin Deficits in Economics
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The validity of the twin deficits issue is examined in the context of Pakistan economy using annual time series data for the period to The three different econometric techniques are used to check the robustness and comparison of results for Twin Deficit hypothesis.
Impulse response function is also imposed to check the policy impact of variables. Results through all co-integration techniques have given a support of Twin Deficit hypothesis and one way causality from current account deficit to the budget deficit has been proved by three approaches.
Finally this empirical study confirms the validity of twin deficits hypothesis and concludes that trade deficit is one of the determinants of budget deficit and can cause it in case of Pakistan. KEYWORDS Ttwin deficits Pakistan, co integration, Causality. Impulse Response Function 1.
This ability depends on the degree to which consumers observe government debt as a net wealth. According to the Keynesian, implications of twin deficit forex, households treat government debt as net wealth.
It means that a substitution of debt for taxes has a positive impact on private consumption and aggregate demand. The resulting decrease in total savings causes higher real interest rates, afterward crowding out private investment, capital inflows and an appreciation of the exchange rate, implications of twin deficit forex, ultimately leading to an increase in the current account deficit CAD.
But the Ricardian approach states that households do not taken government debt as a net wealth. For a given path of government expenditures, the debt-for-taxes replacement has no effect on private consumption and their increased disposable income is fully saved. So the total national saving, interest rate and crowding out effect remains unaffected Wronlowsky and Machacek, As a result of this co-movement, several economists recognized a significant portion of the deterioration in the external balance to the emergence of record budget deficits.
This interlinked relationship is known as the twin deficits hypothesis. As current account imbalances may stop economic growth. According to the Mundell-Fleming, implications of twin deficit forex, an increase in the budget deficit BDEF induces an upward pressure on interest rates that, in turn, will cause capital inflows and an appreciation of the exchange rate, ultimately leading to an increase in the current account deficit CAD.
Although many research have been done on the twin deficit hypothesis. The evidences suggest mixed results about these hypotheses. Pakistan comprises a valuable case study for investing the dynamics of persistently high rates of budget and current account deficits. The debate is incomplete and inconclusive in Pakistan's context, e. ZaidiBurney and Akhtar implications of twin deficit forex Burney and Yasmeen ; Aqeel and Nishat ; Kazimi ; Mukhtar et al.
Some of the studies reached contradicting conclusions due to implications of twin deficit forex pre-specification of the structural relations were used in the models. We have applied the three different econometric techniques which are mostly used to check the long run relationship between variables; Engel Granger Co-integration and Error Correction Mechanics, Johansen Co-integration test and Autoregressive Distributed Lag ARDL Co- integration Bound testing to check the robustness and comparison of results.
Unit root test will apply to check the stationarity of variables and Granger Causality will apply to find direction of relationship between variables. Impulse response function also imposed to check th policy impact of variables. The rest part of the paper is organized as follows. Section 2 reviews the existing literature on Twin Deficits hypothesis. Theoretical and analytical framework is presented in section 3, implications of twin deficit forex.
Section 4 gives data description and econometric methodology. Section 5 discusses the estimation results while section 6 is devoted to conclusion, implications of twin deficit forex. The appendix and references are presented at the end. Vamvoukas suggested that budget deficit has positive and significant effects on trade deficit both in the short run and long run for a small open economy of Greek using annual data.
Alkhatib analyzed positive and one way causality running from trade deficit to budget deficit in the Saudi Arabian economy. Zenginimplications of twin deficit forex, Acaravci and Implications of twin deficit forex and Ferda provide fresh evidence on the validity of twin deficit with no causality for Turkey. Kouassi et al. Aristovnik suggested that high budget deficits in transition economies confirm relatively low level of substitutability between private and public savings.
These results are implying a relatively high correlation between fiscal and external imbalances. Zubaidi et al. They confirmed the existence of a long run relationship between the two deficits. However, the Keynesian reasoning best suits only for Thailand. Bartolini and Lahiriand Tang examined the co movement of fiscal balance, current account balance real GDP and interest rates short- and long run in U.
consumers are statistically insignificant. Saleh and Chowdhury examined the long-run and short-run relationships between the current account deficit, budget deficit, savings and investment gap and trade openness in Sri Lanka. They found that trade openness has a positive effect on the current account deficit, although is statistically insignificant. Fonseca rejected the twin-deficit hypothesis as well as the validity of Ricardian equivalence in Egypt.
Corsetti and Muller also investigated the co-movement of the government budget balance and the trade balance in the perspective of international business cycle theory for 10 OECD countries.
Neaime analyzed unidirectional causal relationship in short run examined the relationship between current account and budget deficits in the small open developing economy of Lebanon. Arize and Malindretos explored bidirectional causality between the Implications of twin deficit forex deficits received strong empirical support in the long run but a unidirectional relationship in short run in Ten African countries.
Baharumshah et al. Merza et al. A statically significant long and short run bidirectional relationship exists between both deficits examined by omoniyi for Nigerian economy.
George et al, implications of twin deficit forex. A direct relationship exists between budget and current account deficits. Kulkarni and Erickson analyzed different evidences of twin deficits for India, Pakistan and Mexico. Aqeel and Nishat found that the budget deficit has positive and significant effect on the trade deficit for Pakistan in long run not in short run.
Mukhtar et al. Siddiqui investigated the twin deficit hypothesis in case of Pakistan. The results confirmed one way direction causal relationship showing trade deficit positively effecting budget deficit in the short run for Pakistan.
Rauf and Qayyum showed that in case of Pakistan the budget deficit is mainly caused by trade deficit and causality run from trade deficit to budget deficit for the period from to by using OLS Technique. The long run relationship between the budget deficit and current account deficit has examined by Saeed and Khan for the period to in case of Pakistan while the Granger causality running from current account to budget deficit by rejecting Ricardian equivalence hypothesis.
Khan and Saeed found a negative relationship between current account balance and investment in short-as well as in long-run and moderate validity of Feldstein-Horioka puzzle but only in the short-run for Pakistan over the period to using autoregressive distributed lag ARDL -bounds testing approach to co-integration.
Another empirical study by Khalil et al. Kashif et al. This causal relationship is known as the twin deficits hypothesis. Moreover the causality of relationship between these deficits is not always observed in any specific direction.
However, when the volumes of these deficits are large, the probability of the relationship between them increases significantly. An extensive theoretical and empirical literature has examined the relationship between current account deficits and other specified macroeconomic variables.
The Keynesian school of thought argues that the budget deficit has a significant impact on the current account deficit. The Keynesian approach argues that an increase in the budget deficit will increase domestic absorption via import expansion, causing a current account deficit. A large body of literature e.
Fleming, implications of twin deficit forex, ; Mundell, ; Kearney and Monadjemi, ; among others suggests that government deficits may cause trade deficits through different channels. However, there are four testable hypotheses arise from the twin deficits phenomena. The first hypothesis, the Keynesian preposition is a key ingredient of the twin-deficit hypothesis.
According to this hypothesis, a tax cut lowers national saving by increasing private disposable income and hence private consumption an increase in imports causing a worsening of the CAD.
The second hypothesis is provided by Barroknown as the Ricardian Implications of twin deficit forex Hypothesis REH. According to this hypothesis, there is no causal relationship between current account deficit and budget deficit. Ricardian equivalence states that, for a given expenditure path, the replacement of debt for taxes has no effect on aggregate demand nor on interest rates.
As a result, a tax increase would reduce budget deficit but would not alter the external deficit. This implies that the tax-financed expenditures do not affect private spending or national saving. The third hypothesis is reverse causality running from current account to budget deficit termed as 'current account targeting' e.
Summers This outcome occurs when the deterioration in current account leads to a slower pace of economic growth and hence increases the budget deficit. The forth hypothesis is the possibility for the existence of bidirectional causality between the two deficits. In other words, a budget deficit Granger-causes current account deficit and vice versa Acarvci et al. The Analytical Framework of Twin Deficit The analytical framework is based on the national income identity.
In an open economy, GDP Y is the sum of private consumption Cprivate investment Igovernment expenditure Gand net exports X-Mas in equation 1 : 3.
Foreign Exchange Market (Budget Deficits)
, time: 3:14A RE-EXAMINATION OF THE TWIN DEFICIT PHENOMENON IN THE NIGERIAN ECONOMY - XYZ
Several authors address twin deficits from the point of view of macroeconomic stability (see Edwards, ). In this vein, Halpern () and Megarbane () underline the negative implications of a combination of adverse factors (e.g. twin deficits, high interest rates and exchange rate depreciation), which may increase the S Pakistan is facing high rates of budget and current account deficits. The validity of the twin deficits issue is examined in the context of Pakistan economy using annual time series data for the period to The three different econometric Several authors address twin deficits from the point of view of macroeconomic stability (see Edwards, ). In this vein, Halpern () and Megarbane () underline the negative implications of a combination of adverse factors (e.g. twin deficits, high interest rates and exchange rate depreciation), which may increase the
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