Dynamisms of Twin Deficit and Pakistan: Empirical Analysis

Abstract

The problem facing both developed as well as developing countries duringthe present and previous turmoilis twin deficit. So similar to many other developing Pakistan is also facing fiscal deficit as well as current account deficit. This research is carried in Pakistan to test that, whether the phenomena of twin deficits prevail or the Ricardian equivalence hypothesis is accepted in Pakistan. The annual data is used to measure the relationship among these two deficits with help of auto regressive distributed lag model in presence of some policy variables. The stationarity and causality also checked through Augmented Dickey Fuller and multivariate causality test. For estimation of short run coefficients’ error correction model is used. The findings of study provide the evidence of positive relationship between current account deficits and acceptedthe hypothesis of twin deficit in Pakistan. The multivariate causality test confirms the bi-directional causality between these deficits. The findings supports the twin deficits hypothesis in Pakistan where reject the Ricardian equivalence hypothesis which suggest no relationship between these two. The government tries to reduce its unproductive expenditures and increase its revenue to decrease the deficit. Some other variables also affect the current account deficit, like exchange rate, interest rate; saving and investment etc. policy changes also affect these two deficits.