ASYMMETRIES IN TWIN DEFICITS HYPOTHESIS: AN EMPIRICAL ASSESSMENT FOR PAKISTAN

Variations in fiscal policy can lead to predictable developments in an open economy’s current account performance, although this remains a contentious issue. The twin deficits hypothesis holds that budget and current account deficits are so closely intertwined that reductions in the former are both...

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Bibliographic Details
Published in:Pakistan economic and social review 2021-12, Vol.59 (2), p.253-285
Main Authors: Mukhtar, Tahir, Jehan, Zainab, Maryam, Khoula
Format: Article
Language:English
Subjects:
Analysis
Asymmetry
Budget deficits
Developing countries
Economic crisis
Expenditures
Fiscal policy
Foreign exchange rates
GDP
Gross Domestic Product
Hypotheses
Interest rates
International finance
International trade
Macroeconomics
Monetary policy
Trade deficit
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Summary:Variations in fiscal policy can lead to predictable developments in an open economy’s current account performance, although this remains a contentious issue. The twin deficits hypothesis holds that budget and current account deficits are so closely intertwined that reductions in the former are both necessary and sufficient conditions for improving the latter’s performance. The present study has attempted to re-examine the validity of the twin deficits phenomenon in Pakistan over the period from 1980 to 2018. For the empirical investigation, the study has employed the Non-Linear Auto Regressive Distributed Lag (NARDL) technique. The findings of the study exhibit an asymmetric impact of budget balance on current account balance both in the short-and long-run. The asymmetric relationship between both the macroeconomic variables gives compelling arguments for developing policies that are adaptive to changing dynamics in both the internal and external sectors.
ISSN:1011-002X
2224-4174