Analyses of Fiscal and Current Account Balances: Do Deficits Matter in Lower and Middle-Income Countries?
DOI:
https://doi.org/10.55737/qjss.664180389Keywords:
Fiscal Deficit, Current Account Deficit, Lower and Middle-Income CountriesAbstract
This research investigates the nexus between current and fiscal account deficits in selected lower and middle-income countries (LMC) by applying panel data from 2000 to 2020. Autoregressive Distributed Lag (ARDL) is applied to check the long-run (LR) and short-run (SR) affiliation between selected variables. The findings revealed that REER, GDPPCG, and trade affect CAB positively, while FD and GFCF influence the CAB negatively in the LR. The SR estimation results show that FD and GFCF are significant in positively affecting CAB. Moreover, this paper proved that the Theory of Ricardian-Equivalence-Hypothesis (REH) is more appropriate for LMC. From the policy perspective, the authorities should follow policy measures such as raising taxes, declining government expenditures, and promoting economic growth to decline the current account deficit. Similarly, the Government of LMC should also improve the investment rate by controlling the high birth rate, inflation rate, and poverty.
Downloads
References
Abbasi, M. A., Amran, A., Rehman, N. A., and Ali, A. (2021). Twin Deficit and Macroeconomic Indicators in Emerging Economies: A Comparative Study of Iran and Turkey. The Journal of Asian Finance, Economics and Business, 8(5), 617-626. https://www.dbpia.co.kr/Journal/articleDetail?nodeId=NODE10630122
Abell, J. D. (1990). Twin deficits during the 1980s: An empirical investigation. Journal of Macroeconomics, 12(1), 81–96. https://doi.org/10.1016/0164-0704(90)90057-h
Akinyemi, O., Alege, P. O., Amaghionyeodiwe, L. A., & Ogundipe, A. A. (2014). Fuel subsidy reform and environmental quality in Nigeria. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2489904
Alam, K. J., Ghosh, B. C., Islam, M., & Hossain, M. E. (2014). Empirical analysis of twins’ deficits in Bangladesh. IOSR Journal of Humanities and Social Science, 19(1), 65-72. https://doi.org/10.9790/0837-191126572
Anas, M. (2013). Twin deficits in Morocco: an empirical investigation. International Journal of Business and Social Research, 3(7), 160-172. https://doi.org/10.18533/ijbsr.v3i7.257
Aqeel, A., Nishat, M., & Qayyum, A. (2000). The Twin Deficits Phenomenon: Evidence from Pakistan [with Comments]. The Pakistan Development Review, 39(4), 535–550. http://www.jstor.org/stable/41260283
Ayinde, T. B., Nicholson, C. F., & Ahmed, B. (2023). Multiple-year farm-level assessments of trade-offs between GHG emissions and income: case examples of two farming systems in Northern Nigeria. Environmental Science and Pollution Research, 1-11. https://doi.org/10.1007/s11356-023-27534-9
Badaik, S., & Panda, P. K. (2020). Impact of fiscal deficit on macroeconomic variables in India. VISION: JOURNAL OF INDIAN TAXATION, 7(2), 17-33. https://doi.org/10.17492/jpi.vision.v7i2.722036
Bakarr, T. A. (2014). Fiscal deficits and current account imbalances: Evidence from Sierra Leone. International Journal of Business and Social Science, 5(8), 256-269.
Banday, U. J., & Aneja, R. (2019). Twin deficit hypothesis and reverse causality: a case study of China. Palgrave Communications, 5(1), 1–10. https://doi.org/10.1057/s41599-019-0304-z
Barro, R. J. (1989). The ricardian approach to budget deficits. Journal of Economic Perspectives, 3(2), 37-54. https://doi.org/10.1257/jep.3.2.37
Batchman, D. D. (1992) Why Is the US Current Account Deficit So Large: Evidence from Vector Auto Regressions. Southern Economic Journal, 59, 232-240. http://dx.doi.org/10.2307/1060527
Chowdhury, K., & Saleh, A. S. (2007). Testing the Keynesian proposition of twin deficits in the presence of trade liberalization: Evidence from Sri Lanka. Economics Working Paper Series 2007. https://ro.uow.edu.au/commwkpapers/174
Çoban, H., & Balikçioğlu, E. (2016). Triple deficit or twin divergence: A dynamic panel analysis. Ekonomik ve Sosyal Araştırmalar Dergisi, 12(1), 271-280. https://dergipark.org.tr/tr/download/article-file/528632
Corsetti, G., & Muller, G. J. (2006). Twin deficits: Squaring theory, evidence and common sense. Economic Policy, 21(48), 598-638. https://doi.org/10.1111/j.1468-0327.2006.00167.x
Damalie, N., Daniel, A. (2019). The Twin Deficit Hypothesis: An Empirical Analysis for Uganda. North American Academic Research, 2(7), 239-271. https://zenodo.org/record/3357228
Dey, S. R., & Tareque, M. (2021). Twin deficits hypothesis in Bangladesh: An empirical investigation. International Journal of Emerging Markets, 17(9), 2350-2379. https://doi.org/10.1108/ijoem-06-2020-0628
El-Khishin, S., & El-Saeed, J. (2021). The twin deficit hypothesis in the MENA region: Do geopolitics matter? Economies, 9(3), 124. https://doi.org/10.3390/economies9030124
Evans, P., & Hasan, I. (1994). Are consumers ricardian? Evidence for Canada. The Quarterly Review of Economics and Finance, 34(1), 25-40. https://doi.org/10.1016/1062-9769(94)90051-5
Even, L., & Zubaidi A., B. (2006). Twin Deficits Hypothesis in SEACEN Countries: A Panel Data Analysis of Relationships between Public Budget and Current Account Deficits. Applied Econometrics and International Development, 6(2), 213-226. https://www.usc.gal/economet/reviews/aeid6215.pdf
Fleming, J. M. (1962). Domestic Financial Policies under Fixed and under Floating Exchange Rates . Staff Papers - International Monetary Fund, 9(3), 369. https://doi.org/10.2307/3866091
Hashemzadeh, N. & Wilson, L., (2006). The dynamics of current account and budget deficits in selected countries in Middle East and North Africa. International Research Journal of Finance and Economics, 5(2006), 112-129.
Iram, M. P. S., Shadid, A., Mahpara, S., and Fazli, R. (2011). Old Wine in New Bottles: Testing the Keynesian Preposition of Twin Deficit in Case of Pakistan. International Journal of Business and Social Science, 2(5), 209.
Iyidogan, P. V. (2013). The Twin Deficits Phenomenon In Turkey: An Empirical Investigation. Journal of Business Economics and Finance, 2(3), 36-42. https://dergipark.org.tr/en/pub/jbef/issue/32415/360486
JACKSON, E., & JABBIE, M. (2020). Twin deficits hypothesis as an indication of government failure in Sierra Leone: An empirical investigation (1980-2018). İktisat Politikası Araştırmaları Dergisi - Journal of Economic Policy Researches, 7(1), 43-68. https://doi.org/10.26650/jepr658440
Jawaid, S. T., & Raza, S. A. (2012). Dynamics of current account deficit: A lesson from Pakistan. Transition Studies Review, 19(3), 357-366. https://doi.org/10.1007/s11300-012-0251-5
Kearney, C., & Monadjemi, M. (1990). Fiscal policy and current account performance: International evidence on the twin deficits. Journal of Macroeconomics, 12(2), 197-219. https://doi.org/10.1016/0164-0704(90)90029-a
Khan, M. A., Jaffri, A. A., Abbas, F., & Haider, A. (2017). Does trade liberalization improve trade balance in Pakistan? South Asia Economic Journal, 18(2), 158-183. https://doi.org/10.1177/1391561417713128
Kim, S., & Roubini, N. (2008). Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the US Journal of International Economics, 74(2), 362-383. https://doi.org/10.1016/j.jinteco.2007.05.012
Kulkarni, K. G., & Erickson, E. L. (2011). Twin deficit revisited: Evidence from India, Pakistan and Mexico. Journal of Applied Business Research (JABR), 17(2). https://doi.org/10.19030/jabr.v17i2.2076
Lam, N. X. (2012). Twin deficits hypothesis and Feldstein-Horioka puzzle in Vietnam. International Research Journal of Finance and Economics, 101(9), 169-179. https://se.ueh.edu.vn/wp-content/uploads/nghien-cuu/6-Twin-deficits-hypothesis-and-Feldstein-Horioka-puzzle-in-Vietnam-Nguyen-Xuan-Lam.pdf
Latif-Zaman, N., & DaCosta, M. N. (1990). The Budget Deficit and the Trade Deficit: Insights into This Relationship. Eastern Economic Journal, 16(4), 349–354. http://www.jstor.org/stable/40325309
Lau, E. & Haw, C. T. (2003). Transmission mechanism of twin deficit hypothesis: Evidence from two neighboring countries. INTI Journal, 1(3), 159-166.
Lau, E. & Tang, T.C. (2009). Twin deficits in Cambodia: an empirical study. Economics Bulletin, 29(4), 2783-2794.
Madjidov, B., & Omonov, N. (2021). Twin Deficit Hypothesis: An Empirical Study in Uzbekistan. Экономика: анализы и прогнозы, (2), 22-27.
Magoti, E., Mabula, S., & Ngong’ho, S.B. (2020). Triple Deficit Hypothesis: A Panel ARDL and Dumitrescu Hurlin Panel Causality for East African Countries. African Journal of Economic Review, 3(1), 144-161.
Mahuni, K. (2016). Validating Twin Deficit Hypotheses: The Zambian Case.
Mann, C. (2002). Electronic commerce, networked readiness, and trade competitiveness. The Global Information Technology Report 2001–2002. http://livernspleen.com/wp-content/uploads/2012/12/readiness-for-the-networked-world.pdf#page=106
Mann, C. L. (1999). Is the US trade deficit sustainable? Peterson Institute.
Marinheiro, C. F. (2008). Ricardian equivalence, twin deficits, and the Feldstein–Horioka puzzle in Egypt. Journal of Policy Modeling, 30(6), 1041–1056. https://doi.org/10.1016/j.jpolmod.2007.12.001
Martin, L. L. (Ed.). (2015). The Oxford handbook of the political economy of international trade. Oxford University Press.
Merza, E., Alawin, M., & Bashayreh, A. (2012). The Relationship between Current Account and Government Budget Balance: The Case of Kuwait. International Journal of Humanities and Social Science, 2(7), 168-177. https://www.ijhssnet.com/journals/Vol_2_No_7_April_2012/19.pdf
MILLER, S. M., & RUSSEK, F. S. (1989). ARE THE TWIN DEFICITS REALLY RELATED? Contemporary Economic Policy, 7(4), 91–115. https://doi.org/10.1111/j.1465-7287.1989.tb00577.x
Mitra, P., & Khan, G. S. (2014). Impact of trade openness, FDI inflows and total exports on economic growth of India: An econometric approach. IOSR Journal of Economics and Finance, 4(5), 60-68. https://doi.org/10.9790/5933-0456068
Mohanty, D. J., Kumar, R. S., & Goswami, A. (2018). Trade-credit modeling for deteriorating item inventory system with preservation technology under random planning horizon. Sādhanā, 43(3). https://doi.org/10.1007/s12046-018-0807-0
Mohanty, R. K. (2018). An empirical investigation of twin deficits hypothesis: Evidence from India. Journal of Quantitative Economics, 17(3), 579-601. https://doi.org/10.1007/s40953-018-0136-5
Mukhtar, T., Jehan, Z., and Maryam, K. (2021). Asymmetries in Twin Deficits Hypothesis: An Empirical Assessment for Pakistan. Pakistan Economic and Social Review, 59(2), 253-285. http://pu.edu.pk/images/journal/pesr/PDF-FILES/5-v59_2_21.pdf
Müller, G. J. (2008). Understanding the dynamic effects of government spending on foreign trade. Journal of International Money and Finance, 27(3), 345-371. https://doi.org/10.1016/j.jimonfin.2008.01.005
Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29(4), 475-485. https://doi.org/10.2307/139336
Nautiyal, N., Belwal, S., & Belwal, R. (2022). Assessment, interaction and the transmission process of twin deficit hypothesis: Fresh evidence from India. Business Perspectives and Research, 11(2), 269-286. https://doi.org/10.1177/22785337211070378
Nazier, H., & Essam, M. (2012). Empirical Investigation of Twin Deficits Hypothesis in Egypt (1992-2010). Middle Eastern Finance and Economics Journal, 17(2012), 45-58. https://mpra.ub.uni-muenchen.de/53428/
Njoroge, E. K. (2014). Testing the twin deficit hypothesis for Kenya 1970-2012. International Journal of Business and Economics Research, 3(5), 160. https://doi.org/10.11648/j.ijber.20140305.11
Onafowora, O. A., & Owoye, O. (2006). An empirical investigation of budget and trade deficits: The case of Nigeria. The Journal of Developing Areas, 39(2), 153-174. https://doi.org/10.1353/jda.2006.0009
Oshota, S. O., & Badejo, A. A. (2015). What drives current account balance in west africa states: Evidence from panel ardl. Journal of International and Global Economic Studies, 8(2), 91-105.
Parikh, A., & Rao, B. (2006). "Do fiscal deficits influence current accounts? A case study of India". Review of Development Economics, 10(3), 492-505. https://doi.org/10.1111/j.1467-9361.2006.00370.x
Perera, A., & Liyanage, E. (2012). An empirical investigation of the twin deficit hypothesis: Evidence from Sri Lanka. Staff Studies, 41(1), 41. https://doi.org/10.4038/ss.v41i1.4683
Pesaran, M. H., & Shin, Y. (1999), An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. In: Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. Cambridge: Cambridge University Press.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Rahman, M., & Mishra, B. (1992). Cointegration of US budget and current account deficits: Twins or strangers? Journal of Economics and Finance, 16(2), 119-127. https://doi.org/10.1007/bf02920112
Ramu, A. (2016). “Twin Deficits” Hypothesis. Foreign Trade Review, 52(1), 15–29. https://doi.org/10.1177/0015732516650825
Rauf, A., & Khan, A. Q. (2011). An empirical study to find the relationship between Trade deficit and Budget Deficit in Pakistan. Academic Research International, 1(3), 36.
Rehman, A., & Saeed, S. (2017). Validity of twin deficit hypothesis in case of Pakistan: Using different cointegration techniques. Economics, Commerce and Trade Management: An International Journal, 1(1), 45-57. https://airccse.com/ectij/papers/1117ectij04.pdf
Rehman, N. A., Shamshir, M., & Shakir, K. (2020). Correlation of Macroeconomic Variables with Twin Deficit in Pakistan. IBT Journal of Business Studies (JBS), 16(1), 16-1. https://ibtjbs.ilmauniversity.edu.pk/journal/jbs/16.1/1.pdf
Saba, S. (2015). The Effect of Inflation Uncertainty on Budget Deficit: Evidence from Iran. Developing Country Studies, 5(11), 41-46. https://www.iiste.org/Journals/index.php/DCS/article/viewFile/23092/23611
Saeed, S. & Khan A. (2012). Twin deficit hypothesis: the case of Pakistan 1972-2008. Natural and Applied Sciences, 3(2), 155-162. http://www.savap.org.pk/journals/ARInt./Vol.3(2)/2012(3.2-20).pdf
Sakyi, D. & Opoku, E.E.O. (2016). The twin deficits hypothesis in developing countries: Empirical evidence for Ghana. Working Paper, International Growth Centre (IGC).
Samotu, I. A., Orisadare, M. A., & Olaoye, O. (2020). Twin Deficit Hypothesis In The Presence Of Structural Breaks In Nigeria. Ilorin Journal of Economic Policy, 7(1), 35-48.
Shahbaz, M., Nasir, M. A., & Lahiani, A. (2020). Role of financial development in economic growth in the light of asymmetric effects and financial efficiency. International Journal of Finance & Economics, 27(1), 361-383. https://doi.org/10.1002/ijfe.2157
Shastri, S. (2019). Re-examining the twin deficit hypothesis for major South Asian economies. Indian Growth and Development Review, 12(3), 265-287. https://doi.org/10.1108/igdr-11-2018-0124
Smyth, D. J., & Hsing, Y. (1995). In search of an optimal debt ratio for economic growth. Contemporary Economic Policy, 13(4), 51-59. https://doi.org/10.1111/j.1465-7287.1995.tb00731.x
Suresh, K. G. & Tiwari, A. K. (2014). A Structural VAR (SVAR) analysis of fiscal shocks on current account in India. Macroeconomics and Finance in Emerging Market Economies, 7(1), 140-153. https://doi.org/10.1080/17520843.2013.828764
Suresh, K. G., & Gautam, V. (2015). Relevance of twin deficit hypotheses: an econometric analysis with reference to India. Theoretical Economics Letters, 5(02), 304. https://doi.org/10.4236/tel.2015.52036
Tandon, S. (2014). Trade balance and the real exchange rate. Foreign Trade Review, 49(2), 117-139. https://doi.org/10.1177/0015732514525222
Tufail, M. K., Anwar, S., & Abbas, K. (2014). Effect of budget deficit on trade deficit in Pakistan (a time series analysis). Journal of Finance and Economics, 2(5), 145-148. https://doi.org/10.12691/jfe-2-5-2
VAMVOUKAS, G. A. (1999). The twin deficits phenomenon: Evidence from Greece. Applied Economics, 31(9), 1093-1100. https://doi.org/10.1080/000368499323571
Van Bon, N. (2014). Current Account and Fiscal Deficits Evidence of Twin Divergence from Selected Developing Economies of Asia. Southeast Asian Journal of Economics, 2(2), 33-48.
Volcker, P. A. (1987). Facing up to the twin deficits, In R. Fink, and J. High, (Eds), A nation in debt: economists debate the Federal budget deficit, Maryland: University Publications of America.
Vyshnyak, O. (2000). Twin deficit hypothesis: The case of Ukraine. Kyiv: National University Kyiv, Mohyla Academy.
Wheeler, M. (1999). The macroeconomic impacts of government debt: An empirical analysis of the 1980s and 1990s. Atlantic Economic Journal, 27(3), 273–284. https://doi.org/10.1007/bf02299578
Yasmin, A., Tasneem, S., & Fatema, K. (2015). Effectiveness of Digital Marketing in the Challenging Age: an Empirical Study. The International Journal of Management Science and Business Administration, 1(5), 69–80. https://doi.org/10.18775/ijmsba.1849-5664-5419.2014.15.1006
Downloads
Published
Issue
Section
License
Copyright (c) 2023 M Ashraf Al Haq, Sohail Rasheed, Khawaja Asif Mehmood
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
