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On the link between current account and fiscal imbalances in the presence of structural breaks: Empirical evidence from Egypt

Yazid Dissou () and Yousra Nafie

The Quarterly Review of Economics and Finance, 2021, vol. 79, issue C, 15-27

Abstract: This study provides an empirical analysis for Egypt of the link between fiscal and current account imbalances, which is also known in the literature as the twin deficit hypothesis. We assess the link between the two deficits in the presence of structural breaks using the Autoregressive Distributed Lag (ARDL) model and the bootstrap causality test. Our empirical results suggest that we reject the twin deficit hypothesis over the long-run. Instead, we find support for the Ricardian equivalence hypothesis. The absence of any long-run relationship between the two variables is backed by our bootstrap causality test and our FM-OLS (Fully Modified Ordinary Least Squares) regression results. Still, we find support for the existence of a link between the two deficits in the short-run. The results from the ARDL model with breaks contrast with those in earlier studies without breaks. The latter rejected both the twin deficit and the Ricardian equivalence hypotheses.

Keywords: Budget imbalance; Current account imbalance; Twin-deficit hypothesis; Ricardian equivalence; ARDL; Structural breaks; Egypt (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.qref.2020.12.004

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