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Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis: Case Study of Indonesia

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  • Wirasti, Anisha
  • Widodo, Tri

Abstract

This paper aims to empirically examine the Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis in the case of Indonesia. The cointegration result shows that fiscal imbalances, investment and current account imbalances have a long run relationship. Autoregressive Distributed Lag (ARDL) and Autoregressive Distributed Lag-Error Correction Model (ARDL-ECM) approaches are applied to estimate the long run and short run relationships, respectively. The estimation results show that the fiscal imbalances have a positive impact on the current account imbalances in Indonesia. Meanwhile, investments have a negative impact on the current account. Those results indicate that Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis hold in Indonesia.

Suggested Citation

  • Wirasti, Anisha & Widodo, Tri, 2017. "Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis: Case Study of Indonesia," MPRA Paper 77442, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:77442
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    References listed on IDEAS

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    7. Aristovnik, Aleksander & Djurić, Sandra, 2010. "Twin deficits and the Feldstein-Horioka puzzle: a comparison of the EU member states and candidate countries," MPRA Paper 24149, University Library of Munich, Germany.
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    Cited by:

    1. Edmund Ayesu & John O. Olaomi, 2021. "The Relationship Between Fiscal Deficit and Current Account Deficit in the Case of the West African Monetary Zone: A Bivariate DSEM/RDSEM Approach," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(7), pages 575-590, July.

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    More about this item

    Keywords

    Twin Deficit Hypothesis; Feldstein-Horioka Hypothesis; ARDL; ECM.;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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