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Ricardian Equivalence, Twin Deficits, and the Feldstein-Horioka puzzle in Egypt

  • Carlos Marinheiro


    (GEMF and Faculdade de Economia, Universidade de Coimbra)

Egypt has presented important budget imbalances. This paper tries to evaluate whether Egypt’s public deficit has had any impact on current account imbalances, examining the validity of the twin deficit hypothesis for Egypt. We conclude for the presence of a (weak) long-run relationship between the budget deficit and the current account deficit. Yet, we reject the twin-deficit hypothesis: we found evidence in favour of a reverse Granger-causality running from the external deficit to the budget deficit. Further, we conclude against the validity of full Ricardian equivalence in Egypt and present evidence in favour of a high degree of capital mobility.

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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2006-07.

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Length: 39 pages
Date of creation: 2006
Date of revision:
Publication status: Published in Journal of Policy Modeling 30(6): 1041-1056, 2008.
Handle: RePEc:gmf:wpaper:2006-07
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  1. Eugene Kouassi & Mbodja Mougoué & Kern O. Kymn, 2004. "Causality tests of the relationship between the twin deficits," Empirical Economics, Springer, vol. 29(3), pages 503-525, 09.
  2. Jarko Fidrmuc, 2003. "The Feldstein–Horioka Puzzle and Twin Deficits in Selected Countries," Economic Change and Restructuring, Springer, vol. 36(2), pages 135-152, June.
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  5. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
  6. Reinhart, Carmen & Calvo, Guillermo, 1999. "The Consequences and Management of Capital Inflows: Lessons for Sub-Saharan Africa," MPRA Paper 7901, University Library of Munich, Germany.
  7. Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers 31, CREFE, Université du Québec à Montréal.
  8. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
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  12. Thissen, Mark & Lensink, Robert, 2001. "Macroeconomic effects of a currency devaluation in Egypt: An analysis with a computable general equilibrium model with financial markets and forward-looking expectations," Journal of Policy Modeling, Elsevier, vol. 23(4), pages 411-419, May.
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  15. Ahmad Zubaidi Baharumshah & Evan Lau, 2005. "Budget and Current Account Deficits in SEACEN Countries: Evidence Based on the Panel Approach," International Finance 0504002, EconWPA.
  16. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  17. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
  18. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  19. Arvind Subramanian, 1997. "The Egyptian Stabilization Experience: An Analytical Retrospective," IMF Working Papers 97/105, International Monetary Fund.
  20. Ahmad Zubaidi Baharumshah & Evan Lau, 2002. "On the Sustainability of Current Account Deficits: Evidence from Four ASEAN Countries," Working Papers 0062, National University of Ireland Galway, Department of Economics, revised 2002.
  21. Sebastian Edwards, 2001. "Does the Current Account Matter?," NBER Working Papers 8275, National Bureau of Economic Research, Inc.
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