Testing relevance of twin deficit for a transition economy like Pakistan.
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Date
2015
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Transylvanian Review of Administrative Sciences.
Abstract
The relationship between trade defi cit and
fi scal defi cit has remained an important topic in
the last decades. The literature reveals many
attempts to investigate the relationship between
the two defi cits, while terminologies like Keynesian
Proposition, Ricardian Equivalence, and
Targeting Current Account Defi cit are used for
the relationship between the two defi cits. The
literature also highlights the possibility of unidirectional
or bidirectional causality between these
defi cits for different countries and different time
spans.
These four possibilities have inspired us to
investigate these possibilities in the light of many
control variables like unemployment, urbanization,
money supply, foreign direct investment,
and economic development in the case of Pakistan.
The fi ndings of the study reveal that fi scal
defi cit signifi cantly accelerates trade defi cit into
both long term and short term; hence, it supports
the Keynesian Proposition in Pakistan, while a
bidirectional causality between fi scal defi cit and
trade defi cit into both long term and short term
was also observed. Moreover, the mean and
variance of error term were also found to be
structurally stable which confi rms the absence
of structural break for the selected period in Pakistan.
In the end, based on these fi ndings, this
study has concluded that two possibilities prevail
out of four on the relationship between fi scal and
trade defi cits. The twin defi cit is relevant and it
does prevail in a transition economy like Pakistan
Description
Keywords
Economics, Pakistan, fi scal and trade defi cit (twin defi cit), causality, cointegration.
Citation
Hassan, M. S.,Wajid, A., Mahmood, H., & Shahbaz, M. (2015). Testing Relevance of Twin Deficit for a Transition Economy Like Pakistan. Transylvanian Review of Administrative Sciences, 11(46), 91-106.(Muhammad Shahid Hassan and Ayesha Wajid) (IF 0.28 JCR Listed)