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The Twin Deficit Theory has been researched extensively across multiple economic environments. Still, its relevance and real-world consequences can vary dramatically based on the particular economic condition of a country. Therefore, this study empirically analyzes the impact of the budget deficit on the trade deficit in Tanzania. Quarterly time series data is collected from 2005 to 2023. Autoregressive Distributed Lag (ARDL) Model estimation with a bound cointegration test establishes the short- and long-term relationship. The results show that the budget deficit increases the trade deficit in the long run. This implies that the theory exists in Tanzania. The results highlight the critical need for the country to reduce its budget deficit by improving revenue collection, expanding the tax base, fighting tax evasion, and improving expenditure efficiency for better public resource management. [ABSTRACT FROM AUTHOR]

Energy trade balance has been the main factor behind current account imbalances in many developed and developing countries. This study investigates whether or not renewable energy conveys information to the current account deficit of selected OECD countries. Utilizing a dataset spanning from 1990 to 2021, we apply a Panel Autoregressive Distributed Lag (ARDL) estimator to determine the interrelation of current account deficit (CAB) as a percentage of GDP with selected indicators, namely, net energy import in total final energy consumption (NEI), the share of renewable energy in total electricity production (REN_TEO), and fiscal deficit as a percentage of GDP (FAB). The results of long-term estimations reveal that as net energy import increases, the current account deficit deteriorates. On the other hand, in the case that countries utilize more of renewable energy in their total electricity generation, their current account deficits improve. Thus, we conclude that energy policy matters for the current account balances and subsequently for the well-being of OECD economies. Finally, we find strong evidence for the twin deficit hypothesis, as fiscal deficit is negatively interrelated with current account deficit both in the short-run and long run. In other words, an increase in the level of budget deficit is associated with an upsurge in the current account deficit problem. Furthermore, the Dumitrescu-Hurlin causality test reveals that there is bidirectional heterogeneous causality between current account deficit and budget deficit. Additionally, when the countries in the sample are grouped by their per capita GDP levels, estimations reveal that the direction of interaction between CAB and energy-related indicators (NEI and REN_TEO) does not differ between Group 2 (the ones whose per capita incomes are over USD 25,000 but below USD 50,000) and Group 3 (the ones having more than USD 50,000 per capita income) countries. However, the coefficients of energy-related indicators for Group 2 countries are higher than those of Group 3 ones, suggesting that energy policy matters more for Group 2 countries' current account imbalances in the long-term. [ABSTRACT FROM AUTHOR]

Twin deficit is the simultaneous occurrence of budget deficit and current account deficit, which has adverse effects on the performance of various sectors of the economy. On the other hand, filling the twin deficit gap by relying on public debt is harmful to the economy if it exceeds the limits. In this study, the relationship between the twin deficits hypothesis and the role of sukuk as a new financing solution in compared with public debt financing have been investigated in 14 sukuk issuance selected countries. The data was analyzed using the General Method of Moment (GMM). The studied sample includes countries with a high volume of sukuk issuance in the period of 2012-2021. The findings show that with the presence of public debt, the effect of the budget balance on the current account balance increased from 0/46% to 0/68%, and the size of the net coefficient estimated at 0/22% indicates the strengthening of the twin deficit relationship. On the other hand, with the existence of sukuk, the positive relationship between the budget balance and the current account balance decreases from 0/75% to 0/66%, which weakening the twin deficits by almost 0/10%. In fact, the results indicate that sukuk can improve the current account balance in the direct method and in the indirect method, through Ricardian considerations, by compensating changes in savings, it can lead to the reduction of the twin deficit relationship. In fact, efficient financial instruments may implement Ricardian properties in economies and reduce the effect of fiscal policies on the current account. [ABSTRACT FROM AUTHOR]

Following the present scale of fiscal imbalances, governments often implement fiscal consolidation programs to restore macroeconomic stability. This paper empirically explores the connections between social expenditure, current account and fiscal consolidations using the system-GMM estimator, on a panel of 23 emerging and middle-income countries for the 2009–2018 period. Our results confirm that government social expenditure decreases once fiscal austerity measures are implemented, practically when they are spending-driven. Fiscal consolidation may hurt important social expenditure allocation mainly on education and health components. Furthermore, we find that fiscal consolidation improves the current account deficit, providing support for the twin deficits hypothesis. These findings indicate that fiscal consolidation will eventually contribute to medium- and long-term external debt stability through the current account improvement. However, the exclusion of key growth determinants such as human capital can lead to many inefficiencies such as weak competition in the provision of social services (Jafarov and Gunnarsson in Government spending on health care and education in Croatia: Efficiency and reform options, working paper 136, International Monetary Fund, 2008). We suggest rationalizing social spending and devoting the country's revenue to necessary and economically productive projects. The efficient use of resources will thus ensure better quality of education and health care services. This calls for good governance, an adequate administration and effective delivery structures. [ABSTRACT FROM AUTHOR]

The twin deficit hypothesis explains that there is a relationship between budget deficit and current account deficit. While the traditional Keynesian approach confirms this relationship, the theory of Ricardian equivalence argues that such a relationship is not available. The aim of this study is to investigate whether the twin deficit hypothesis in the Kyrgyz economy in the 1993-2021 period is valid. ARDL bounds testing approach and Toda-Yamamoto causality test were used to analyze the short and long-term relationship between budget deficit and current account deficit. As a result of these tests, it has been confirmed that there is a longterm relationship between the two deficits. According to the result of causality analysis, it was found that there was a one-way relationship from budget deficit to current account deficit. Accordingly, it was concluded that budget deficits in the Kyrgyz economy have an impact on current account deficit. This result is compatible with the traditional Keynesian approach. [ABSTRACT FROM AUTHOR]

This paper analyzes the effect of the fiscal deficit on the current account deficit in the European Union during the period 1995-2018. The purpose is to examine to what extent an increase in government spending affects the deterioration of terms of trade and contributes to increasing external imbalances. Econometric methods for heterogeneous panel data models are used to analyse the existence of a long-run relationship between the fiscal deficit and the current account. The empirical findings indicate that the twin deficits hypothesis is not confirmed for the whole European Union, but only for a certain number of member states, where a long-run relationship still exists, confirming the impact of the fiscal deficit on the current account.

The twin deficit hypothesis suggests that there is a relationship between the budget deficit and the current account deficit. The traditional Keynesian Approach emphasizes that budget deficits resulted in the current account deficit. On the other hand, the Ricardian Equivalence Approach argues that there is no relationship between budget deficits and current account deficit. In this study, the validity of the twin deficit hypothesis and Feldstein Horioka (1980) hypothesis is analyzed using both the Breaking Periods of the Westerlund-Edgerton Breaking Cointegration Test (2008) and the Dumitrescu & Hurlin (2012) Panel Causality Test. According to the cointegration and causality analyzes, it is concluded that there is a long-term relationship between budget deficits and current account deficits. This result supports the Traditional Keynesian Approach. Furthermore, it is seen that there is a two-way relationship between budget deficits and current account deficits. Long term coefficients were obtained by using the AMG test. When the panel coefficient results are considered, it is seen that the twin deficit hypothesis is valid, but the results are obtained contrary to the analysis found by Feldstein Horioka (1980). However, when the individual countries are examined, it is seen that the twin deficit hypothesis applies to some countries, and the twin divergence hypothesis applies to some other countries. Besides, it is understood that the study results do not support the Feldstein-Horioka (1980) hypothesis. [ABSTRACT FROM AUTHOR]

This paper examines the relationship between fiscal and external balances in MENA oil versus non-oil countries in the context of the twin deficits hypothesis (TDH) using Panel Vector Autoregression- Generalized Methods of Moments PVAR GMM estimation, Granger Causality and IRFs. The essence of this analysis is to assess the vulnerability of fiscal and external balances to oil price dynamics and regional geopolitics in the region. Results show that a twin-deficit problem exists in MENA oil-rich countries only while the problem does not exist in non-oil ones. This affirms the hypothesis that oil dependence results in high fiscal vulnerability to geopolitical shocks that automatically transmits to external balances. While a TDH isn’t proven to exist in non-oil countries, fiscal and external balances problems result from longstanding structural factors. A high reliance on tourism revenues and remittances as main sources of foreign currency receipts (together with poor tax administration and enlarged current spending bills) makes those countries more vulnerable to domestic and external shocks; reflected in both growing fiscal and current account deficits. A large imports sector and relatively poor exporting capacity also contribute to weakening external accounts. The main policy recommendations for MENA oil-rich countries rely in the importance of strengthening the non-oil sector in order to diversify domestic sources of revenues. Adopting flexible exchange rates is recommended to decrease the vulnerability of the external shocks to oil price dynamics. For non-oil MENA regions, fiscal consolidation, reforming current spending and strengthening tax administrations are crucial to improve fiscal performance. Export-led growth strategies and inclusive growth policies would also contribute to improving external accounts in the examined economies.

This paper investigates the causality relationship between budget and current account deficits for 14 Asian countries. The major findings based on bootstrap Granger causality tests in heterogenous mixed panels are: First, investments (and foreign capital inflows) have a notable impact on the current account prior to the Asian financial crisis of 1997-1998. Second, we detect direct causality between the budget and the current account imbalances before but not after the crisis. The data suggest that the current account targeting hypothesis, that is, the reverse causality, prevails after the crisis. Third, budget deficits have a significant influence on both investment and foreign capital inflows in the second period. Fourth, Asian countries are less susceptible to the influence of FDI inflows in the aftermath of the crisis. Finally, structural break turns out crucial in assessing the causal patterns of the twin deficits nexus in the Asian countries. [ABSTRACT FROM AUTHOR]

Recent developments in the Bulgarian economy bring into question the validity of the twin deficit hypothesis. This paper analyses the theoretical foundations of and alternative explanations for this hypothesis and uses different econometric approaches to test its validity on a sample of the Bulgarian data. A Granger causality test suggests the existence of dual causality between the fiscal and current account deficits. A vector autoregressive and a vector error correction model both reject the twin deficit hypothesis in the short run, but indicate that it might be valid in the long run.

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The stimulus packages announced to deal with the economic slowdown has increased the fiscal deficit of many countries and it spurred the debate on the possible effect of these fiscal shocks on other economic variable especially the current account. In this study, we examine the effect of fiscal deficit on current account of India using the VAR as well as the Structural VAR (SVAR) analysis. Our analysis indicates that the fiscal deficit is positively affecting the current account deficit in India, as predicted by the twin deficit hypothesis. Therefore, the historical data indicates the presence of the twin deficits phenomenon in Indian context. [ABSTRACT FROM AUTHOR]

Recent developments in the economies of the CEE countries bring into question the validity of the twin deficit hypothesis since we observed combination of high current account deficits and prevailingly stable fiscal positions before the crisis and just the opposite combination after it. The paper starts with the analysis of the theoretical foundations of the twin deficit hypothesis and the alternative explanations about the relationship between current account and fiscal deficits. Different econometric techniques are applied to test the validity of diverse theoretical approaches on the basis of panel data for CEE countries. OLS panel regression shows relatively modest positive connection between current account and fiscal deficits what confirms the twin deficit paradigm. On the other hand, the twin deficit hypothesis can be rejected in the case of Bulgaria and Estonia. The vector autoregressive analysis is also not compatible with the twin deficit hypothesis. Further research is necessary to overcome these contradictory results. [ABSTRACT FROM AUTHOR]

Recent developments in the Bulgarian economy bring into question the validity of the twin deficit hypothesis. This paper analyses the theoretical foundations of and alternative explanations for this hypothesis and uses different econometric approaches to test its validity on a sample of the Bulgarian data. A Granger causality test suggests the existence of dual causality between the fiscal and current account deficits. A vector autoregressive and a vector error correction model both reject the twin deficit hypothesis in the short run, but indicate that it might be valid in the long run. [ABSTRACT FROM AUTHOR]

This paper examines the relationship between fiscal and external balances in MENA oil versus non-oil countries in the context of the twin deficits hypothesis (TDH) using Panel Vector Autoregression- Generalized Methods of Moments PVAR GMM estimation, Granger Causality and IRFs. The essence of this analysis is to assess the vulnerability of fiscal and external balances to oil price dynamics and regional geopolitics in the region. Results show that a twin-deficit problem exists in MENA oil-rich countries only while the problem does not exist in non-oil ones. This affirms the hypothesis that oil dependence results in high fiscal vulnerability to geopolitical shocks that automatically transmits to external balances. While a TDH isn't proven to exist in non-oil countries, fiscal and external balances problems result from longstanding structural factors. A high reliance on tourism revenues and remittances as main sources of foreign currency receipts (together with poor tax administration and enlarged current spending bills) makes those countries more vulnerable to domestic and external shocks; reflected in both growing fiscal and current account deficits. A large imports sector and relatively poor exporting capacity also contribute to weakening external accounts. The main policy recommendations for MENA oil-rich countries rely in the importance of strengthening the non-oil sector in order to diversify domestic sources of revenues. Adopting flexible exchange rates is recommended to decrease the vulnerability of the external shocks to oil price dynamics. For non-oil MENA regions, fiscal consolidation, reforming current spending and strengthening tax administrations are crucial to improve fiscal performance. Export-led growth strategies and inclusive growth policies would also contribute to improving external accounts in the examined economies. [ABSTRACT FROM AUTHOR]