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A Twin Deficit Hypothesis: The Case Study of Pakistan

Author

Listed:
  • Hammad Manzoor

    (PIDE Islamabad Pakistan)

  • Muhammad Zeeshan Younas

    (QAU Islamabad Pakistan)

  • Rashid Mehmood

    (COMSATS University Islamabad Pakistan)

  • Muhammad Ali Rizwan

    (QAU Islamabad Pakistan)

Abstract

This paper analyses the twin deficit reaction function for Pakistan economy covering the period of 1973-2017. Empirical analysis is based on Vector Autoregressive (VAR) technique with its extension impulse response functions and Granger causality. Results show that the trade deficits directly cause the budget deficits and the budget deficit influences the trade deficit through different channels. The most familiar linkage is causality flowing from budget deficits to inflation to rate of interest to capital inflows to exchange rate (currency appreciation) and finally the trade deficits.

Suggested Citation

  • Hammad Manzoor & Muhammad Zeeshan Younas & Rashid Mehmood & Muhammad Ali Rizwan, 2019. "A Twin Deficit Hypothesis: The Case Study of Pakistan," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 8(3), pages 117-131, September.
    • Handle: RePEc:rfh:bbejor:v:8:y:2019:i:3:p:117-131
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    References listed on IDEAS

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    1. Elias Soukiazis & Micaela Antunes & Ioannis Kostakis, 2018. "The Greek economy under the twin-deficit pressure: a demand orientated growth approach," International Review of Applied Economics, Taylor & Francis Journals, vol. 32(2), pages 215-236, March.
    2. Georgios Karras, 2019. "Are “twin deficits” asymmetric? Evidence on government budget and current account balances, 1870–2013," International Economics, CEPII research center, issue 158, pages 12-24.
    3. Tuck Cheong Tang & Evan Lau, 2009. "General Equilibrium Perception on Twin Deficits Hypothesis: An Empirical Evidence for the U.S," Monash Economics Working Papers 09-09, Monash University, Department of Economics.
    4. Ali, Amjad & Ur Rehman, Hafeez, 2015. "Macroeconomic Instability and Its Impact on Gross Domestic Product: An Empirical Analysis of Pakistan," MPRA Paper 82496, University Library of Munich, Germany, revised 2015.
    5. Kalou, Sofia & Paleologou, Suzanna-Maria, 2012. "The twin deficits hypothesis: Revisiting an EMU country," Journal of Policy Modeling, Elsevier, vol. 34(2), pages 230-241.
    6. Javed Ahmad Bhat & Naresh Kumar Sharma, 2018. "The twin-deficit hypothesis: revisiting Indian economy in a nonlinear framework," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 10(3), pages 386-405, June.
    7. Elias Soukiazis & Micaela Antunes & Ioannis Kostakis, 2018. "The Greek economy under the twin-deficit pressure: a demand orientated growth approach," International Review of Applied Economics, Taylor & Francis Journals, vol. 32(2), pages 215-236, March.
    8. Pesaran, M. Hashem, 2015. "Time Series and Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780198759980.
    9. Helmy, Heba E., 2018. "The twin deficit hypothesis in Egypt," Journal of Policy Modeling, Elsevier, vol. 40(2), pages 328-349.
    10. Ahmad, Ahmad Hassan & Aworinde, Olalekan Bashir & Martin, Christopher, 2015. "Threshold cointegration and the short-run dynamics of twin deficit hypothesis in African countries," The Journal of Economic Asymmetries, Elsevier, vol. 12(2), pages 80-91.
    11. Holmes, Mark J., 2011. "Threshold cointegration and the short-run dynamics of twin deficit behaviour," Research in Economics, Elsevier, vol. 65(3), pages 271-277, September.
    12. Olusegun Ayodele Akanbi & Rashid Sbia, 2018. "Investigating the twin-deficit phenomenon among oil-exporting countries: Does oil really matter?," Empirical Economics, Springer, vol. 55(3), pages 1045-1064, November.
    13. Chen, David Y., 2007. "Effects of monetary policy on the twin deficits," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(2), pages 279-292, May.
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    Cited by:

    1. Syed Sadaqat Ali Shah & Sarmad Jadoon & Muhammad Asim Afridi, 2023. "Relevance of twin deficit hypothesis in the presence of structural breaks: an evidence from Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(4), pages 3305-3320, August.
    2. Ibrar Hussain & Umar Hayat & Md Shabbir Alam & Uzma Khan, 2024. "A Dynamic Analysis of the Twin-Deficit Hypothesis: the Case of a Developing Country," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(1), pages 25-52, March.

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    More about this item

    Keywords

    Twin Deficit; VAR; Granger Causality; Impulse Response Function; Pakistan;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F6 - International Economics - - Economic Impacts of Globalization
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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