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Dynamics of Twin Deficits in South Asian Countries

Mumtaz, Kinza and Munir, Kashif (2016): Dynamics of Twin Deficits in South Asian Countries.

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The study aimed to analyze twin deficit hypothesis in South Asian countries i.e. Bangladesh, India, Pakistan and Sri Lanka. The study also intended to examine the Ricardian Equivalence Hypothesis and Feldstein Horioka Puzzle. For achieving these objectives the study used annual time series data from 1981 to 2014. Autoregressive distributed lag model (ARDL) bound testing approach for cointegration and Granger causality through VAR test have been employed for estimation. Results found no evidence of twin deficit hypothesis in all countries in the long run. While, findings of causality test exhibits no relationship among current account deficit, budget deficit and private saving investment balance except for Bangladesh where bidirectional relationship exists between budget deficit and current account balance in short run. Results support Ricardian equivalence hypothesis only for India and Pakistan while Feldstein Horioka Puzzle is rejected in both these countries implying high international capital mobility and financial integration. The study suggests that in South Asia fiscal and trade sectors reforms and perfect integration of capital markets are required to stabilize the economy.

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