Relevance of twin deficit hypothesis in the presence of structural breaks: an evidence from Pakistan

Syed Sadaqat Ali Shah (), Sarmad Jadoon () and Muhammad Asim Afridi ()
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Syed Sadaqat Ali Shah: Central University of Finance and Economics
Sarmad Jadoon: COMSATS University Islamabad
Muhammad Asim Afridi: COMSATS University Islamabad

Quality & Quantity: International Journal of Methodology, 2023, vol. 57, issue 4, No 18, 3305-3320

Abstract: Abstract Pakistan experienced consistent rise in budget deficit and current account deficit that dampened the country’s abilities to achieve sustained economic growth over the last several years. To this aim, this study intends to investigate the existence of twin deficit hypothesis in the presence structural breaks over the last four decades. Utilizing time series data for the years 1980–2019 and employing Zivot-Andrew unit root test, ADF, PP and ARDL approaches, we find that budget deficit being statistically significant in the short-run and long-run positively affect the current account deficit of the country. The effects are unaltered when we run regression with structural break and without structural breaks. The study, thus, confirms the presence of twin deficit hypothesis in both the short-run and long-run periods in case of Pakistan. Thus, a consistent, well devised and prudent fiscal policy help alleviate the current account deficit of Pakistan over the last four decades.

Keywords: Budget deficit; Current account deficit; Twin deficit; Structural break; ARDL; Zivot-Andrew unit root; H60; H62; F32 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11135-022-01511-9

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