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An Investigation of Twin Deficit Hypothesis in Iran: Two Regimes Threshold Vector Autoregressive Approach

Author

Listed:
  • Kohansal , Mohammadreza

    () (Professor of Agricultural Economics, Ferdowsi University of Mashhad)

  • Alizadeh, Parisa

    () (Ph.D. Student of Agricultural Economics, Ferdowsi University of Mashhad)

Abstract

One of the most important economic problems of many developing countries is happening of the budget deficit and the current account deficit at the same time, that have adverse effects on performance of various sectors of the economy. In this study the twin deficit hypothesis in Iran was tested. For this purpose nonlinear relationship between budget deficit and current account deficit in the period of 1971-2012 was reviewed. At first, the stationary of time series variables examined. Then Johansen co-integration test was performed. There was a co-integration vector between budget deficit and current account deficit. The causality test in a frame of a vector autoregressive model showed a bi-directional causal relationship between the variables. Then the non-linearity test was performed and after confirmation of non-linearity, two regimes threshold vector autoregressive model was estimated. Also the unit root test of non-linear models (KS) was applied. The results showed that the current account deficit in the short run will be affected by budget deficit and current account deficit increase with the increasing of the budget deficit. But in the long run, these two variables are treated as independent together.

Suggested Citation

  • Kohansal , Mohammadreza & Alizadeh, Parisa, 2015. "An Investigation of Twin Deficit Hypothesis in Iran: Two Regimes Threshold Vector Autoregressive Approach," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 2(3), pages 73-92, December.
  • Handle: RePEc:ris:qjatoe:0020
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    More about this item

    Keywords

    Budget deficit; Current account deficit; Twin deficit hypothesis.;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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