Testing twin deficits hypothesis using VARs and Variance decomposition

Baharumshah, Ahmad Zubaidi and Lau, Evan and Khalid, Ahmed M. (2006) Testing twin deficits hypothesis using VARs and Variance decomposition. Journal of the Asia Pacific Economy, 11 (3). pp. 331-624. ISSN 1354-7860

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Official URL: http://dx.doi.org/10.1080/13547860600764245

Abstract

This paper examines the twin deficits hypothesis in the ASEAN countries. The major findings of this paper are the following. (1) Long run relationships are detected between budget and current account deficits. (2) The Keynesian view fits well for Thailand since the causality runs from budget deficit to current account deficit. For Indonesia, the causality runs in an opposite direction 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 leading to the appreciation of the exchange rate, which in turn leads with the widening of the current account deficit. 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.

Item Type:Article
Keyword:Twin deficits, cointegration, variance decomposition
Subject:Budget deficits - Southeast Asia
Subject:Deficit financing - Southeast Asia
Subject:Cointegration - Southeast Asia
Faculty or Institute:Faculty of Economics and Management
DOI Number:10.1080/13547860600764245
ID Code:18281
Deposited By: Azwana Abdul Rahman
Deposited On:19 Oct 2011 09:52
Last Modified:21 Oct 2011 04:09

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