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Long-Run Linkage Between Budget Deficit And Trade Deficit In Lebanon: Results From The Uecm And Bounds Tests

  • Ali Salman Saleh

    (School of Business, Monash University Malaysia.)

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    This paper examines the linkage between budget deficit and trade deficit for Lebanon during the period from 1975 to 2003. The purpose is to test the validity of the Keynesian proposition and the Ricardian equivalence in the case of Lebanon. A robust econometric framework called the unrestricted error correction model (UECM) and a cointegration test called the bounds test are used to examine whether budget deficit and trade deficit are cointegrated. The Granger causality test shows that causality runs from trade deficit to budget deficit and the relationship is positive and statistically significant. The empirical analysis in this paper partially supports the Keynesian view that there is a linkage between trade deficit and budget deficit but the direction of causality is reversed which is consistent with many other empirical studies. The result suggests that any policy measures to reduce the trade deficit in Lebanon could well assist in reducing the Lebanese budget deficit.

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    Article provided by IIUM Journal of Economis and Management in its journal IIUM Journal of Economics and Management.

    Volume (Year): 14 (2006)
    Issue (Month): 1 (December)
    Pages: 29-48

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    Handle: RePEc:ije:journl:v:14:y:2006:i:1:p:29-48
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    1. Bundt, Thomas & Solocha, Andrew, 1988. "Debt, deficits and the dollar," Journal of Policy Modeling, Elsevier, vol. 10(4), pages 581-600.
    2. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," NBER Working Papers 2685, National Bureau of Economic Research, Inc.
    3. Kearney, Colm & Monadjemi, Mehdi, 1990. "Fiscal policy and current account performance: International evidence on the twin deficits," Journal of Macroeconomics, Elsevier, vol. 12(2), pages 197-219.
    4. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
    5. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    6. Ahmed M. Khalid & Teo Wee Guan, 1999. "Causality tests of budget and current account deficits: Cross-country comparisons," Empirical Economics, Springer, vol. 24(3), pages 389-402.
    7. David J. Smyth & Yu Hsing, 1995. "In Search Of An Optimal Debt Ratio For Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 13(4), pages 51-59, October.
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