Reverse Causality between Fiscal and Current Account Deficits in ASEAN: Evidence from Panel Econometric Analysis

Maran Marimuthu, Hanana Khan and Romana Bangash
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Maran Marimuthu: Department of Management and Humanities, Universiti Teknologi PETRONAS, Seri Iskandar 32610, Malaysia
Hanana Khan: Department of Management and Humanities, Universiti Teknologi PETRONAS, Seri Iskandar 32610, Malaysia
Romana Bangash: Institute of Management Sciences (IM|Sciences), Peshawar 25000, Pakistan

Mathematics, 2021, vol. 9, issue 10, 1-18

Abstract: This study aims to explore the causal relationship between fiscal deficit (FD) and current account deficit (CAD) along with policy recommendations based on long-run and short-run dynamics and sensitivities. A panel data span from 1990 to 2019 is analyzed based on panel unit root tests, panel co-integration with auto-regressive distributed lag (ARDL), panel co-integration regression with fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS), and causal analysis with the Dumitrescu and Hurlin (DH) technique. The results disclosed that all tested variables are stationary at the first difference I(1) except the real interest rate (IR), which is stationary at level I(0). The ARDL estimates suggested that there is a long-run relationship between tested variables and 92% annual convergence is possible for long-run equilibrium. The FMOLS and DOLS estimates indicated that the CAD is sensitive towards the FD and the exchange rate. The DH causality test showed that the CAD is significantly affecting the FD, supporting the current account targeting hypothesis. Furthermore, it is observed that the interest rate is acting as a moderating factor between the FD and the CAD because it causes both the deficits. Thus, reverse causality is concluded from the CAD to the FD. These results have macroeconomic implications for fiscal policy in the Association of South-East Asian Nations (ASEAN-10).

Keywords: fiscal deficit; current account deficit; panel unit root; panel co-integration; DH causal analysis (search for similar items in EconPapers)
JEL-codes: C (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)

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