Dynamics of Twin Deficits, Ricardian Equivalence, and Feldstein-Horioka Puzzle in South Asian Countries

This study examines the relationship between budget deficit and current account deficit, specifically twin deficits hypothesis, Ricardian equivalence hypothesis, and Feldstein-Horioka puzzle in South Asian countries. Results show that budget deficit and private savings investment balance do not affect current account deficit in the long run and rejects the Keynesian view of twin deficits hypothesis in South Asian countries. No causality exists between current account deficit and budget deficit in India, Pakistan, and Sri Lanka in short run, while bidirectional causality exists in Bangladesh. Ricardian equivalence hypothesis is rejected in Bangladesh and Sri Lanka, while it holds in India and Pakistan. Feldstein-Horioka puzzle exists in Bangladesh and Sri Lanka, while it does not exist in India and Pakistan. Structural reforms in fiscal and trade sector are required to avoid emergence of twin deficits, while an active and effective role of government is required for sustainable economic growth.

Twin Deficit Hypothesis and Macroeconomic Fundamentals: New Evidence from Nigeria

This study tests for the validity of the twin-deficit hypothesis in Nigeria for the period 1981 – 2018 and further seeks to ascertain the role of macroeconomic fundamentals in driving this hypothesis using the non-linear autoregressive distributed lag (NARDL) model and structural vector autoregressive (SVAR) model. With evidence from granger causality test, the results obtained for the NARDL model support the validation of the twin-deficit hypothesis for the Nigerian economy. As long-run equilibrium exists, it was further established that the twin deficits were majorly driven by the degrees of financial and trade openness in Nigeria as no substantial shock effects of the twin deficits were traceable to any of the macroeconomic fundamentals. It is therefore recommended that policy makers in Nigeria should properly sequence the degree of economic openness to ensure the overall health of the economy.

Występowanie deficytów bliźniaczych w wybranych państwach Unii Europejskiej i w Polsce w latach 2009–2018

The aim of the article is to determine the degree, direction and strength of impact of the studied variables, i.e. the state budget balance and the current account balance as part of Poland's balance of payments in the years 2009-2018 against the background of selected European Union (EU) countries. The main research questions focus on determining the type of relationships connecting the studied deficits in the light of previous studies dedicated to the twin deficits hypothesis. The methodology used is based on integrated correlation analysis, linear regression and an analysis of the coefficient of variation. As a result of the study, a strong correlation was found between the cumulative values of the studied deficits, which confirms the existence of the twin deficits hypothesis in Poland in the examined period and means that the budget deficit affects the current account balance. A change in the cumulative balance of the budget by 1% leads to a change in the cumulative balance of the current account of the balance of payments by 0.89%. It can be presumed that the problem of budget deficits and the related debt crisis as well as balance of payments balances under the dichotomy of "surplus north" and "deficit south" in the next decade will be one of the most conflicting and disintegrative for the EU. Thus, the search for a path to budget (internal) balance and balance of payments (external) is one of the key challenges for maintaining cohesion and maintaining sustainable development both in Poland and the entire EU.

Twin deficits hypothesis in Bangladesh: an empirical investigation

PurposeThis study attempts to examine the twin deficits hypothesis for Bangladesh. Along with the traditional twin deficits hypothesis associated with the current account and fiscal deficit, the paper also explores the causal relationship between the trade deficit and fiscal deficit.Design/methodology/approachWe start with the investigation of the conventional twin deficit hypothesis employing autoregressive distributed lag (ARDL) bounds testing approach in a multivariate framework. Due to the absence of cointegration between the budget deficit and trade deficit, the study adopts a multivariate vector autoregressive (VAR) model to analyze the nexus.FindingsThe study supports the presence of the twin deficits hypothesis in Bangladesh, both in the short run and long run. Unidirectional causation running from the budget deficit to the current account deficit in the long run. The trade model also supports the twin deficit hypothesis, like the aforementioned current account model.Practical implicationsTherefore, the sustainable fiscal deficit is the key to maintain a stable current account deficit and trade deficit in Bangladesh.Originality/valueThe study incorporates the country risk indicators to address the governance issue while analyzing the models' deficit scenarios because good governance is an integral part of explaining the development outcome and failure of a country like Bangladesh.

Twin Deficits: Evidence From Portugal, Italy, Spain and Greece

Since the mid-2000s, internal and external imbalances have increased in many EU countries. This contributed to the debate over whether government budget deficits affect current account deficits, known as twin deficits hypothesis. It implies that public debt is actually a burden for future taxpayers and thus a dangerous way for budget financing. Therefore, the fiscal measures implemented by policymakers may also affect the current account. This article tests the twin deficits hypothesis for Portugal, Italy, Spain and Greece for the period 1999–2017. The empirical analysis presented in the article finds evidence that strongly supports this hypothesis only for Italy and Greece. For Portugal and Spain, however, the evidence is quite weak.