The dynamic linkages between current account deficit and budget balance deficit in the South Asian region

Iwanthika Rajakaruna and Sandy Suardi

Journal of Asian Economics, 2021, vol. 77, issue C

Abstract: The issue of twin imbalances is at the forefront of fiscal policy concerns in the South Asian region, fuelled by an ever-going budget deficit and current account deficit over the last five decades. A standard approach is to assume a model in which budget balance influences the current account. We relax this assumption by using a panel data vector autoregression model comprising five South Asian countries. The results show that both budget deficit and current account deficit are mutually causative, which contrasts the unidirectional causality running from fiscal deficit to current account deficit found in prior studies. Further, this bi-causality relationship is also demonstrated in the impulse response analyses. Budget balance in South Asian economies responds positively to a one standard deviation positive shock in the current account balance. Likewise, external balance increases to a one standard deviation positive shock in internal balance. Higher fiscal debt impedes economic growth, which in turn impacts negatively on the budget balance. Our findings lead us to reject 'fiscal policy only' recommendations to address the twin deficits.

Keywords: Twin deficits; P-VAR model; Panel Granger causality test; Impulse response function; South Asia (search for similar items in EconPapers)
JEL-codes: C23 E62 F32 H62 H63 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1049007821001226
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:77:y:2021:i:c:s1049007821001226

DOI: 10.1016/j.asieco.2021.101393

Access Statistics for this article

Journal of Asian Economics is currently edited by C. Wiemer

More articles in Journal of Asian Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().