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Dynamics of fiscal and current account deficits in Thailand: an empirical investigation

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Author Info

  • Ahmad Zubaidi Baharumshah
  • Evan Lau

Abstract

Purpose – The purpose of this paper is to contribute further on the twin deficits debate in a developing economy. Design/methodology/approach – The data for Thailand over three decades are used as a case study. Findings – The major findings are: first, a stable, long-run equilibrium relationship between fiscal deficit, interest rate, exchange rate, and current account was found. Second, the causal relationship between the two deficits runs from fiscal deficit to current account deficit. This evidence is supportive of the twin deficits hypothesis. Further econometric analysis reveals that the two financial variables (interest rate and exchange rate) act as intermediating variables – that is an increased fiscal deficit causes interest rate to rise, and this in turn puts pressure on the exchange rate. The appreciation of the domestic currency causes a current account deficit. Originality/value – The paper is of value by showing both direct and indirect channels to uncover the twin deficits phenomena. Based on a persistent profile response, it was found that the adjustment process may take as long as a year to complete.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 34 (2007)
Issue (Month): 6 (November)
Pages: 454-475

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Handle: RePEc:eme:jespps:v:34:y:2007:i:6:p:454-475

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Related research

Keywords: Exchange rates; Fiscal measures; Interest rates; Thailand;

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Citations

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Cited by:
  1. Syed Jawaid & Syed Raza, 2013. "Dynamics of Current Account Deficit: A Lesson from Pakistan," Transition Studies Review, Springer, vol. 19(3), pages 357-366, February.
  2. Hasan, Syed Akif & Subhani, Muhammad Imtiaz & Osman, Ms. Amber, 2012. "Fiscal Deficit cannot be reduced by increasing Taxes (A point to ponder from Pakistan)," MPRA Paper 35681, University Library of Munich, Germany.
  3. 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.
  4. Evan Lau & Tuck Cheong Tang, 2009. "Twin deficits in Cambodia: Are there Reasons for Concern? An Empirical Study," Development Research Unit Working Paper Series 11-09, Monash University, Department of Economics.
  5. Ahmad Zubaidi Baharumshah & Hamizun Bin Ismail, 2012. "The present value model and Thailand's current account balance," Journal of Economic Studies, Emerald Group Publishing, vol. 39(3), pages 337-355, December.
  6. Evan Lau & Tuck Cheong Tang, 2009. "Twin deficits in Cambodia: An Empirical Study," Economics Bulletin, AccessEcon, vol. 29(4), pages 2783-2794.
  7. 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.
  8. Nikolina E. Kosteletou, 2013. "Financial Integration, Euro and the Twin Deficits of Southern Eurozone Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(2), pages 161-178, April.

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