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The Twin Deficits Phenomenon: Evidence from Pakistan

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  • Anjum Aqeel

    (Applied Economics Research Centre (AERC), University of Karachi and Professor of Finance and Economics at Institute of Business Administration (IBA).)

  • Mohammed Nishat

    (Applied Economics Research Centre (AERC), University of Karachi and Professor of Finance and Economics at Institute of Business Administration (IBA).)

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    Abstract

    Like most developing countries a steady budget deficit in Pakistan is the primary cause of all major ills of the economy. It has varied between 5.4 to 8.7 percent during last two decades. On the other hand the current account deficit varied between 2.7 to 7.2 percent during the same period. The variations in fiscal policy can lead to predictable developments in an open economy’s performance on current account, remains a controversial issue. An important aspect of this issue concerns what is termed as twin deficit analysis, according to which fiscal deficits and current account balances are very closely related so that reductions in the former are both necessary and sufficient to obtain improved performance in the later. Theoretical work on the relationship that exist between variations in fiscal policy and the current account balance has been based upon two types of models. These models are constructed from postulated behavioural relationships that purport to describe how the economy works in aggregate without explaining the behaviour of agents who make up the economy.

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    Bibliographic Info

    Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

    Volume (Year): 39 (2000)
    Issue (Month): 4 ()
    Pages: 535-550

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    Handle: RePEc:pid:journl:v:39:y:2000:i:4:p:535-550

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    1. Nadeem A. Burney & Naeem Akhtar, 1992. "Government Budget Deficits and Exchange Rate Determination: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(4), pages 871-882.
    2. Aqdas Ali Kazmi, 1992. "Ricardian Equivalence: Some Macro-econometric Tests for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(4), pages 743-758.
    3. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
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    7. Maurice Obstfeld, 1980. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," NBER Working Papers 0599, National Bureau of Economic Research, Inc.
    8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    9. Stephen M. Miller & Frank S. Russek, 1989. "Are The Twin Deficits Really Related?," Contemporary Economic Policy, Western Economic Association International, vol. 7(4), pages 91-115, October.
    10. Ki-Ho Kim, 1995. "On the Long-Run Determinants of the U.S. Trade Balance: A Comment," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 17(3), pages 447-455, April.
    11. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
    12. Cuddington, John T & Vinals, Jose M, 1986. "Budget Deficits and the Current Account in the Presence of Classical Unemployment," Economic Journal, Royal Economic Society, vol. 96(381), pages 101-19, March.
    13. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    14. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    15. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    16. Nadeem A. Burney & Attiya Yasmeen, 1989. "Government Budget Deficits and Interest Rates: An Empirical Analysis for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 28(4), pages 971-980.
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    Cited by:
    1. Javid, Attiya Y. & Javid, Muhammad & Arif, Umaima, 2011. "Fiscal Policy and Current Account Dynamics in Case of Pakistan," MPRA Paper 34858, University Library of Munich, Germany.

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