The twin deficit hypothesis in Egypt

Heba Helmy

Journal of Policy Modeling, 2018, vol. 40, issue 2, 328-349

Abstract: We employ a new approach to the twin deficit hypothesis aimed at enhancing policy making in Egypt. In contrast to the conventional twin deficit hypothesis between the current account, which comprises many items out of governments’ scope of maneuvering, and the budget deficit, we track the causal link between Egypt’s merchandise trade deficit and the budget deficit. We begin first by examining the conventional twin deficit hypothesis using a VAR model, which implies short run reverse causation running from the current account deficit to the budget deficit. Second, as cointegration exists between the budget deficit and the merchandise trade deficit, we run a multivariate VECM model which refutes the twin deficit hypothesis in favor of the current account targeting hypothesis. In policy terms, ameliorating Egypt’s trade balance would ultimately improve its fiscal balance as well.

Keywords: Egypt; Twin deficits; Cointegration; Vector Autoregression (VAR); Vector Error Correction (VECM) (search for similar items in EconPapers)
JEL-codes: C32 E62 F32 H62 O53 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:40:y:2018:i:2:p:328-349

DOI: 10.1016/j.jpolmod.2018.01.009

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