The “Twin Deficits”: Are They Really Twins? An Empirical Investigation of the Case of a Small Developing Economy

Ajili Wissem

The Icfai Journal of Applied Economics, 2007, vol. VI, issue 1, pages 42-73

Abstract: This paper explores the empirical relationship between budget and current account deficits in the case of a small developing country, Tunisia. The main objective of the investigation is to test the empirical validity of the Ricardian Equivalence Proposition (REP) compared to the Conventional View in the context of a small developing economy. The econometric method used is based on the Error-Correction Modeling in a bivariate than a trivariate setting. Results are more consistent with the REP. No positive causal link between the two deficits is validated. Yet, by using a residual analysis, the study demonstrates that the two deficits are cointegrated.

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