Testing the Keynesian Proposition of Twin Deficits in the Presence of Trade Liberalisation: Evidence from Sri Lanka after War: the case of a bridge too far?

Khorshed Chowdhury () and Ali Salman Saleh ()
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Khorshed Chowdhury: University of Wollongong, http://www.uow.edu.au/commerce/econ/who/index.html
Ali Salman Saleh: University of Wollongong, http://www.uow.edu.au/commerce/econ/who/index.html

Economics Working Papers from School of Economics, University of Wollongong, NSW, Australia

Abstract: This paper examines the long-run and short-run relationships between the current account deficit, budget deficit, savings and investment gap and trade openness in Sri Lanka using the autoregressive distributive lagged (ARDL) approach. The time series properties of the variables, in the presence of endogenous structural breaks, was previously analysed using Perron’s (1997) additive outlier (AO) and innovational outlier (IO) models. The empirical analysis supports the Keynesian view that a link exists between the current account, budget deficit and savings and investment gap. We found that trade openness has a positive effect on the current account deficit, but is statistically insignificant, and offer some strategies to stabilise the budget deficit and current account deficits in Sri Lanka.

Keywords: twin deficit; structural change; unit roots; ARDL (search for similar items in EconPapers)
JEL-codes: E60 E62 C22 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int, nep-mac and nep-pke
Date: 2007
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