Testing Twin Deficits Hypothesis: Using VARs and Variance Decomposition
Ahmad Zubaidi Baharumshah (),
Evan Lau () and
Ahmed M. Khalid
Additional contact information
Ahmed M. Khalid: Bond University
International Finance from University Library of Munich, Germany
This paper examines the twin deficits hypothesis in Indonesia, Malaysia, the Philippines and Thailand (ASEAN-4 countries). The major findings of this paper are: (1) Long run relationships are detected between budget and current account deficits. (2) We found that the Keynesian reasoning fits well for Thailand since a unidirectional relationship exists which runs from budget deficit to current account deficit. For Indonesia the reverse causation (current account targeting) is detected while the empirical results indicate that a bidirectional pattern of causality exists for Malaysia and the Philippines. (3) We also found support for an indirect causal relationship that runs from budget deficit to higher interest rates, and higher interest rates lead to the appreciation of the exchange rate and this leads to the widening of current account deficit. (4) The results of the variance decompositions and impulse response functions suggest that the consequences of large budget and current account deficits become noticeable only over the long run.
Keywords: Twin deficits; Cointegration; Variance Decomposition (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Note: Type of Document - pdf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15) Track citations by RSS feed
Downloads: (external link)
Journal Article: Testing Twin Deficits Hypothesis using VARs and Variance Decomposition (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0504001
Access Statistics for this paper
More papers in International Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().