Munich Personal RePEc Archive

Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis: Case Study of Indonesia

Wirasti, Anisha and Widodo, Tri (2017): Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis: Case Study of Indonesia.

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Abstract

This paper aims to empirically examine the Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis in the case of Indonesia. The cointegration result shows that fiscal imbalances, investment and current account imbalances have a long run relationship. Autoregressive Distributed Lag (ARDL) and Autoregressive Distributed Lag-Error Correction Model (ARDL-ECM) approaches are applied to estimate the long run and short run relationships, respectively. The estimation results show that the fiscal imbalances have a positive impact on the current account imbalances in Indonesia. Meanwhile, investments have a negative impact on the current account. Those results indicate that Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis hold in Indonesia.

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