IDEAS home Printed from https://ideas.repec.org/a/spr/qualqt/v57y2023i4d10.1007_s11135-022-01511-9.html
   My bibliography  Save this article

Relevance of twin deficit hypothesis in the presence of structural breaks: an evidence from Pakistan

Author

Listed:
  • Syed Sadaqat Ali Shah

    (Central University of Finance and Economics)

  • Sarmad Jadoon

    (COMSATS University Islamabad)

  • Muhammad Asim Afridi

    (COMSATS University Islamabad)

Abstract

Pakistan experienced consistent rise in budget deficit and current account deficit that dampened the country’s abilities to achieve sustained economic growth over the last several years. To this aim, this study intends to investigate the existence of twin deficit hypothesis in the presence structural breaks over the last four decades. Utilizing time series data for the years 1980–2019 and employing Zivot-Andrew unit root test, ADF, PP and ARDL approaches, we find that budget deficit being statistically significant in the short-run and long-run positively affect the current account deficit of the country. The effects are unaltered when we run regression with structural break and without structural breaks. The study, thus, confirms the presence of twin deficit hypothesis in both the short-run and long-run periods in case of Pakistan. Thus, a consistent, well devised and prudent fiscal policy help alleviate the current account deficit of Pakistan over the last four decades.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:qualqt:v:57:y:2023:i:4:d:10.1007_s11135-022-01511-9
    DOI: 10.1007/s11135-022-01511-9
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11135-022-01511-9
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11135-022-01511-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eugene Kouassi & Mbodja Mougoué & Kern O. Kymn, 2004. "Causality tests of the relationship between the twin deficits," Empirical Economics, Springer, vol. 29(3), pages 503-525, September.
    2. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2010. "Productivity shocks, budget deficits and the current account," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1562-1579, December.
    3. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    4. Ahmad Baharumshah & Evan Lau & Ahmed Khalid, 2006. "Testing Twin Deficits Hypothesis using VARs and Variance Decomposition," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 11(3), pages 331-354.
    5. Dissou, Yazid & Nafie, Yousra, 2021. "On the link between current account and fiscal imbalances in the presence of structural breaks: Empirical evidence from Egypt," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 15-27.
    6. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
    7. 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.
    8. Artatrana Ratha, 2012. "Twin Deficits or Distant Cousins? Evidence from India1," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 13(1), pages 51-68, March.
    9. Evan Lau & Tuck Cheong Tang, 2009. "Twin deficits in Cambodia: An Empirical Study," Economics Bulletin, AccessEcon, vol. 29(4), pages 2783-2794.
    10. Alberto Bagnai, 2006. "Structural breaks and the twin deficits hypothesis," International Economics and Economic Policy, Springer, vol. 3(2), pages 137-155, November.
    11. Eregha, Perekunah B. & Aworinde, Olalekan B. & Vo, Xuan Vinh, 2022. "Modeling twin deficit hypothesis with oil price volatility in African oil-producing countries," Resources Policy, Elsevier, vol. 75(C).
    12. 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.
    13. Ranjan Kumar Mohanty, 2019. "An Empirical Investigation of Twin Deficits Hypothesis: Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(3), pages 579-601, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Samia OMRANE BELGUITH, 2016. "Twin deficit in MENA countries: an empirical investigation," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 123-146, June.
    2. Eregha, Perekunah B. & Aworinde, Olalekan B. & Vo, Xuan Vinh, 2022. "Modeling twin deficit hypothesis with oil price volatility in African oil-producing countries," Resources Policy, Elsevier, vol. 75(C).
    3. 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.
    4. Rajakaruna, Iwanthika & Suardi, Sandy, 2021. "The dynamic linkages between current account deficit and budget balance deficit in the South Asian region," Journal of Asian Economics, Elsevier, vol. 77(C).
    5. Manamba Epaphra, 0. "The Twin Deficits Hypothesis: An Empirical Analysis for Tanzania," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(65), pages 2-34, September.
    6. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-11.
    7. 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.
    8. Xie, Zixiong & Chen, Shyh-Wei, 2014. "Untangling the causal relationship between government budget and current account deficits in OECD countries: Evidence from bootstrap panel Granger causality," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 95-104.
    9. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 1-16.
    10. Mawejje, Joseph & Odhiambo, Nicholas M., 2022. "The determinants and cyclicality of fiscal policy: Empirical evidence from East Africa," International Economics, Elsevier, vol. 169(C), pages 55-70.
    11. Umer Jeelanie Banday & Ranjan Aneja, 2019. "Twin deficit hypothesis and reverse causality: a case study of China," Palgrave Communications, Palgrave Macmillan, vol. 5(1), pages 1-10, December.
    12. Afonso, António & Coelho, José Carlos, 2022. "The role of fiscal policies for external imbalances: Evidence from the European Union," Economic Systems, Elsevier, vol. 46(2).
    13. Şen, Hüseyin & Kaya, Ayşe, 2016. "Are the twin or triple deficits hypotheses applicable to post-communist countries?," BOFIT Discussion Papers 3/2016, Bank of Finland Institute for Emerging Economies (BOFIT).
    14. Engy Raouf, 2020. "A Non-Linear Autoreggresive Distributed Lag Analysis of the Triple Deficit Hypothesis in the Mena Region," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(8), pages 895-905, August.
    15. Cosimo Magazzino, 2021. "The twin deficits in the ASEAN countries," Evolutionary and Institutional Economics Review, Springer, vol. 18(1), pages 227-248, April.
    16. Bilman, Mustafa Erhan & Karaoğlan, Sadık, 2020. "Does the twin deficit hypothesis hold in the OECD countries under different real interest rate regimes?," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 205-215.
    17. José Carlos Coelho, 2020. "The relationship between budget deficit and external deficit: the case of Portugal," Working Papers REM 2020/0116, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    18. Ashima Goyal & Abhishek Kumar, 2018. "The effect of oil shocks and cyclicality in hiding Indian twin deficits," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 45(1), pages 27-45, January.
    19. Nizar, Muhammad Afdi, 2013. "Pengaruh Defisit Anggaran Terhadap Defisit Transaksi Berjalan Di Indonesia [The Effect of Budget Deficit on Current Accounts Deficit in Indonesia]," MPRA Paper 65609, University Library of Munich, Germany.
    20. Çatık, Abdurrahman Nazif & Gök, Barış & Akseki, Utku, 2015. "A nonlinear investigation of the twin deficits hypothesis over the business cycle: Evidence from Turkey," Economic Systems, Elsevier, vol. 39(1), pages 181-196.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:qualqt:v:57:y:2023:i:4:d:10.1007_s11135-022-01511-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.