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Empirical Investigation of the Twin Deficits Hypothesis: The Egyptian Case (1990-2012)

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  • El-Baz, Osama

Abstract

This paper investigates the relationship between current account and government budget balances. We tested the validity of the Twin Deficits Hypothesis (TDH)in Egypt, using annual time series data for the period (1990-2012). We rejected the TDH, as granger causality tests proved a reverse causal relationship running from the current account deficit to the budget deficit. A "twin divergence" was found to exist between the two deficits in the short run, also the Vector Error Correction Model (VECM) proved the existence of a negative long run equilibrium relationship between both current account and government budget balances, with a relatively high speed of adjustment toward the equilibrium position; as it takes about one year and 4 months to restore the equilibrium position after divergence occurs.

Suggested Citation

  • El-Baz, Osama, 2014. "Empirical Investigation of the Twin Deficits Hypothesis: The Egyptian Case (1990-2012)," MPRA Paper 53428, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:53428
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    References listed on IDEAS

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    Cited by:

    1. Dissou, Yazid & Nafie, Yousra, 2021. "On the link between current account and fiscal imbalances in the presence of structural breaks: Empirical evidence from Egypt," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 15-27.
    2. Naape, Baneng, 2019. "Is the Co-Movement Between Budget Deficit and Current Account Deficit Applicable to South Africa?," MPRA Paper 97962, University Library of Munich, Germany, revised 20 Nov 2019.
    3. Heba Youssef Hashem, 2016. "Determinants of Egyptian Banking Sector Profitability: Time-Series Analysis from 2004-2014," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 9(2), pages 73-78, June.
    4. Samia OMRANE BELGUITH, 2016. "Twin deficit in MENA countries: an empirical investigation," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 123-146, June.

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    More about this item

    Keywords

    Macroeconomics; twin deficits; Cointegration; Vector Error Correction Model.;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F0 - International Economics - - General

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