IDEAS home Printed from https://ideas.repec.org/a/pid/journl/v39y2000i4p535-550.html
   My bibliography  Save this article

The Twin Deficits Phenomenon: Evidence from Pakistan

Author

Listed:
  • 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).)

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.

Suggested Citation

  • Anjum Aqeel & Mohammed Nishat, 2000. "The Twin Deficits Phenomenon: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 535-550.
    • Handle: RePEc:pid:journl:v:39:y:2000:i:4:p:535-550
    as

    Download full text from publisher

    File URL: http://www.pide.org.pk/pdf/PDR/2000/Volume4/535-550.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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 101-119, March.
    2. 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.
    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 373-381, August.
    4. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-1161, December.
    5. Michael J. Moore, 1989. "Inventories in the Open Economy Macro Model: A Disequilibrium Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(1), pages 157-162.
    6. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    7. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
    8. Kimbrough, Kent P., 1985. "An examination of the effects of government purchases in an open economy," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 113-133, March.
    9. 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.
    10. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    11. J. Peter Neary, 1980. "Nontraded Goods and the Balance of Trade in a Neo-Keynesian Temporary Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 403-429.
    12. Ki-Ho Kim, 1995. "On the Long-Run Determinants of the U.S. Trade Balance: A Comment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 17(3), pages 447-455, March.
    13. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    14. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    15. 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.
    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.
    17. Kawai, Masahiro, 1985. "Exchange Rates, the Current Account and Monetary-Fiscal Policies in the Short Run and in the Long Run," Oxford Economic Papers, Oxford University Press, vol. 37(3), pages 391-425, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zia-Ur- Rahman, 2019. "Influence of Excessive Expenditure of the Government in Perspective of Interest Rate and Money Circulation Which in Turn Affects the Growing Process in Pakistan," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 6(2), pages 120-129.
    2. Attiya Y. Javid & Muhammad Javid & Umiama Arif, 2010. "Fiscal Policy and Current Account Dynamics in the Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 577-592.
    3. Mehak Ejaz & Kalim Hyder, 2019. "A Fan Chart Approach to Debt Sustainability in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 24(2), pages 1-23, July-Dec.
    4. Ranjan Kumar Mohanty, 2019. "An Empirical Investigation of Twin Deficits Hypothesis: Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(3), pages 579-601, September.
    5. Rajakaruna, Iwanthika & Suardi, Sandy, 2021. "The dynamic linkages between current account deficit and budget balance deficit in the South Asian region," Journal of Asian Economics, Elsevier, vol. 77(C).
    6. Ali, Wajid & Ahmad, Iftikhar & Javed, Asif & Rafiq, Sara, 2020. "Regime Switches in Pakistan's Fiscal Policy: Markov-Switching VAR Approach," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 27(2).
    7. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-11.
    8. Saima Sarwar, 2015. "Revisiting Ricardian Equivalence Hypothesis (REH) For Pakistan Using Money Demand Function Approach," Journal of Empirical Economics, Research Academy of Social Sciences, vol. 4(3), pages 154-166.
    9. 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.
    10. Nurudeen Abu & Awadh Ahmed Mohammed Gamal, 2020. "An Empirical Investigation of the Twin Deficits Hypothesis in Nigeria: Evidence from Cointegration Techniques," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.
    11. Mumtaz, Kinza & Munir, Kashif, 2016. "Dynamics of Twin Deficits in South Asian Countries," MPRA Paper 74592, University Library of Munich, Germany.
    12. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 1-16.
    13. Piotr Bartkiewicz, 2020. "Quantitative Easing: New Normal or Emergency Measure?," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Selahattin Dibooglu, 1997. "Accounting for US current account deficits: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 787-793.
    2. 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.
    3. Attiya Y. Javid & Muhammad Javid & Umiama Arif, 2010. "Fiscal Policy and Current Account Dynamics in the Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 577-592.
    4. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    5. George Vamvoukas, 1999. "The twin deficits phenomenon: evidence from Greece," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1093-1100.
    6. Umer Jeelanie Banday & Ranjan Aneja, 2019. "Twin deficit hypothesis and reverse causality: a case study of China," Palgrave Communications, Palgrave Macmillan, vol. 5(1), pages 1-10, December.
    7. Singh, Tarlok, 2004. "On the optimizing model of the balance of trade in India," Journal of Policy Modeling, Elsevier, vol. 26(5), pages 605-625, July.
    8. 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.
    9. Kalim Hyder, 2001. "Crowding-out Hypothesis in a Vector Error Correction Framework: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 633-650.
    10. 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.
    11. Hany Eldemerdash & Hugh Metcalf & Sara Maioli, 2014. "Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective," Empirical Economics, Springer, vol. 47(3), pages 825-851, November.
    12. Eregha, Perekunah B. & Aworinde, Olalekan B. & Vo, Xuan Vinh, 2022. "Modeling twin deficit hypothesis with oil price volatility in African oil-producing countries," Resources Policy, Elsevier, vol. 75(C).
    13. Victor A. Beker, 2016. "The European Debt Crisis," Financial and Monetary Policy Studies, in: Modern Financial Crises, edition 127, chapter 0, pages 135-160, Springer.
    14. Bashiri Behmiri, Niaz & Pires Manso, José R., 2012. "Does Portuguese economy support crude oil conservation hypothesis?," Energy Policy, Elsevier, vol. 45(C), pages 628-634.
    15. Ramona Dumitriu & Razvan Stefanescu, 2015. "The Relationship Between Romanian Exports And Economic Growth After The Adhesion To European Union," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 17-26.
    16. Muhammad Shahbaz & Pervaz Azim & Khalil Ahmad, 2011. "Exports-Led Growth Hypothesis in Pakistan: Further Evidence," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 1(3), pages 182-197.
    17. Catherine Bruneau & Eric Jondeau, 1999. "Long‐run Causality, with an Application to International Links Between Long‐term Interest Rates," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 545-568, November.
    18. Yanhua Chen & Rosario N Mantegna & Athanasios A Pantelous & Konstantin M Zuev, 2018. "A dynamic analysis of S&P 500, FTSE 100 and EURO STOXX 50 indices under different exchange rates," PLOS ONE, Public Library of Science, vol. 13(3), pages 1-40, March.
    19. Song, Chi-Young, 1997. "The Real Exchange Rate and the Current Account Balance in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 143-184, June.
    20. N M Odhiambo, 2008. "Financial Development in Kenya: a Dynamic Test of the Finance-led Growth Hypothesis," Economic Issues Journal Articles, Economic Issues, vol. 13(2), pages 21-36, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pid:journl:v:39:y:2000:i:4:p:535-550. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Khurram Iqbal (email available below). General contact details of provider: https://edirc.repec.org/data/pideipk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.