The Twin Deficits Hypothesis in the Australian Context

Neil Dias Karunaratne ()
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Neil Dias Karunaratne: The University of Queensland, Department of Economics, Postal: Brisbane QLD 4072 Australia,, http://www.uq.edu.au/economics/

Economia Internazionale / International Economics, 1992, vol. 45, issue 3-4, 330-350

Abstract: This paper reviews the Australian twin deficits during the flexible exchange rate period. Past analytics and empirics have rejected the twin deficits in the Australian context. But recent simulations based on large macroeconometric models report that a fiscal contraction will improve the current account. The cointegration and causality tests used in this study revealed the existence of a weak secular relation between the twins. To examine the transmission channels that may link the twins a simultaneous equation model was used. The estimates of the structural parameters of the twin deficits model and the impact and total multipliers provided information on the transmission channels and the complex dynamics that govern the twins. The study results indicated that the links between the twins are weak, but nevertheless they exist. Therefore contractionary policies may not be able to deliver on current account and debt sustainability targets as expected by activists. The ineffectiveness of the transmission channels between the twins is partly attributable to the adverse effects of the deep rooted structural malaise in the Australian economy.

Date: 1992
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