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The Twin Deficits Problem in Sri Lanka

Author

Listed:
  • Ali Salman Saleh
  • Mahendhiran Nair
  • Tikiri Agalewatte

    (Address for first (corresponding author) and second author: School of Business, Monash University Malaysia, No. 2, Jalan Kolej, Bandar Sunway, 46150 Petaling Jaya, Selangor Malaysia, Phone: +603 56360600 Ext. 3330, Fax: +60358804358. E–mails: saleh.asalman@buseco.monash.edu.my and Mahendhiran.Nair@buseco.monash.edu.my; for third author: School of Economics and Information Systems, University of Wollongong. E–mail: tba01@uow.edu.au)

Abstract

Many economists have argued that prolonged fiscal expansions contribute to current account imbalances. The purpose of this paper is to explore this phenomenon in the case of Sri Lanka during the period 1970 to 2003. In this study, the autoregressive distributed lag (ARDL) model and the bounds test for cointegration (Pesaran et al. 2001) were used to assess the long-run dynamics between the twin deficits in Sri Lanka. The empirical analysis in this paper supports the Keynesian view that there is a long-run relationship between current account imbalances and budget deficit. The empirical results also show that the direction of causality runs from the budget deficit to the current account deficit. Thus, any policy measures to reduce the budget deficit in Sri Lanka could well assist in reducing the current account imbalances. Strategies and policies to manage the twin-deficits are discussed in this paper.

Suggested Citation

  • Ali Salman Saleh & Mahendhiran Nair & Tikiri Agalewatte, 2005. "The Twin Deficits Problem in Sri Lanka," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 6(2), pages 221-239, September.
    • Handle: RePEc:sae:soueco:v:6:y:2005:i:2:p:221-239
    DOI: 10.1177/139156140500600204
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Dushni Weerakoon & Utsav Kumar & Roselle Dime, 2019. "Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits," Working Papers id:13022, eSocialSciences.
    3. Nurgun Topalli & İbrahim Dogan, 2016. "The structure and sustainability of current account deficit: Turkish evidence from regime switching," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(4), pages 570-589, June.
    4. Farzane Bagheri & Salma Keshtkaran, 2012. "Testing for Twin Deficits and Ricardian Equivalence Hypotheses: Evidence from Iran," Journal of Social and Development Sciences, AMH International, vol. 3(3), pages 77-84.
    5. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    6. Mossadak Anas, PhD researcher, 2013. "Twin deficits in Morocco: An empirical investigation," International Journal of Business and Social Research, LAR Center Press, vol. 3(7), pages 160-172, July.
    7. Murshed, Muntasir & Nijhum, Nawrin Khan, 2019. "The Fiscal and Current Account Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh," MPRA Paper 97115, University Library of Munich, Germany.

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