An Empirical Investigation of Twin Deficits Hypothesis for Six Emerging Countries

Abstract

This paper aims to analyze Keynesian well-known twin deficits hypothesis for a group of emerging countries using quarterly data between 1996 and 2006. Twin deficits hypothesis argues that there is a positive relationship between budget deficit and trade deficit. Several papers have analyzed this relationship but reached no consensus on the existence of twin deficits. This study differing from traditional ones investigates the relationship by employing panel cointegration technique to six emerging markets. Our empirical results show that unlike studies employing traditional methods, twin deficits hypothesis is supported using advanced econometric techniques for the panel data.

Keywords: Twin Deficits, Emerging Markets, Panel Cointegration

JEL Classification: C33, F32, H62