Budget-current account deficits nexus in Malaysia

Puah, Chin-Hong and Lau, Evan and Tan, Kim Lee (2006): Budget-current account deficits nexus in Malaysia. Published in: The Journal of Global Business Management , Vol. 2, No. 2 (2006): pp. 126-135.

Abstract

The purpose of this study is to contribute further on the twin deficits debate in a developing economy. The data for Malaysia over four decades is used as a case study. Empirical result obtained from the Johansen-Juselius (1990) cointegration test indicates that budget deficit and current account deficit do not contain common stochastic trend in the long run. However, the findings from the Granger non-causality test by Toda-Yamamoto (1995) support the Summer’s (1988) reverse causation proposition. This implies that a unidirectional causality running from current account to budgetary variable where the deterioration in current account deficit could worsen the budgetary position in the case of Malaysia.

• Item Type: MPRA Paper
• Language: English
• Keywords: Twin deficits; Fiscal policy; Toda-Yamamoto test
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit ; Surplus

References

Abell, J.D. (1990). Twin deficits during the 1980’s: An empirical investigation. Journal of Macroeconomics, 12, 81-96.

Ahmed, S. (1986). Temporary and permanent government spending in an open economy: Some evidence for the United Kingdom. Journal of Monetary Economics, 17, 197-224.

Akbostanci, E., & Tunc, G.I. (2002). Turkish twin deficits: An error correction model of trade balance. Economic Research Center (ERC) Working Papers in Economic, No. 6.

Alkswani, M.A. (2000). The twin deficits phenomenon in petroleum economy: Evidence from Saudi Arabia. Paper presented in Seventh Annual Conference, Economic Research Forum (ERF), Amman, Jordan.

Anoruo, A., & Ramchander, S. (1998). Current account and fiscal deficits: Evidence from five developing economies of Asia. Journal of Asian Economics, 9(3), 487-501.

Bachman, D.D. (1992). Why is the US current account deficit so large? Evidence from vector autoregressions. Southern Economic Journal, 59(2), 232-240.

Bank Negara Malaysia. Quarterly Statistical Bulletin, various issues. Kuala Lumpur: Bank Negara Malaysia.

Barro, R.J. (1974). Are government bonds net wealth? Journal of Political Economy, 82, 1095-1117.

Barro, R.J. (1989). The Ricardian approach to budget deficits. Journal of Economic Perspectives, 3, 37-54.

Darrat, A.F. (1988). Have large budget deficits caused rising trade deficits? Southern Economic Journal, 54, 879-886.

Dewald, W.G., & Ulan, M. (1990). The twin deficit illusion. Cato Journal, 10, 689-707.

Dibooglu, S. (1997). Accounting for U.S. current account deficits: An empirical investigation. Applied Economics, 29, 787-793.

Enders, W., & Lee, B.S. (1990). Current account and budget deficits: Twin or distant cousins? The Review of Economics and Statistics, 72, 373-381.

Evans, P., & Hasan, I. (1994). Are consumers Ricardian? Evidence for Canada. Quarterly Review of Economics and Finance, 34, 25-40.

Gujarati, D. (1999). Essentials of econometrics (2nd ed.). Boston: Irwin McGraw-Hill.

Hatemi, A., & Shukur, G. (2002). Multivariate-based causality tests of twin deficits in the US. Journal of Applied Statistics, 29, 817-824.

International Monetary Fund, International Financial Statistics, various issues, Washington D.C.: IMF.

Islam, M.F. (1998). Brazil’s twin deficits: An empirical examination. Atlantic Economic Journal, 26, 121-128.

Johansen, S. (1988). Statistical analysis of cointegaration vectors. Journal of Economics, Dynamics and Control, 12, 231-234.

Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551-1580.

Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and interference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169-210.

Kaufmann, S., Scharler, J., & Winckler, G. (2002). The Austrian current account deficit: Driven by twin deficits or by intertemporal expenditure allocation? Empirical Economics, 27, 529-542.

Khalid, A.M., & Teo, W.G. (1999). Causality tests of budget and current account deficits: Cross-country comparisons. Empirical Economics, 24, 389-402.

Kouassi, E., Mougoué, M., & Kymn, K.O. (2004). Causality tests of the relationship between the twin deficits. Empirical Economics, 29, 503-525.

Laney, O.L. (1984). The strong dollar, the current account, and the federal deficits: Cause and effect. Federal Reserve Bank of Dallas, Economic Review, January, 1-14.

Leachman, L.L., & Francis, B. (2002). Twin deficits: Apparition or reality? Applied Economics, 34, 1121-1132.

Mansouri, B. (1998). Fiscal deficits, public absorption and external imbalances: An empirical examination of the Moroccan case. Economic Research Forum (ERF) Working Paper, No. 0138.

Miller, S.M., & Russek, F.S. (1989). Are the twin deficits really related? Contemporary Policy Issues, 7, 91-115.

Normadin, M. (1999). Budget deficit persistence and the twin deficits hypothesis. Journal of International Economics, 49, 171-193.

Osterwald-Lenum, M. (1992). A note with quantiles of the asymptotic distribution of maximum likelihood cointegration rank test statistic. Oxford Bulletin of Economics and Statistics, 54, 461-472.

Piersanti, G. (2000). Current account dynamics and expected future budget deficits: Some international evidence. Journal of International Money and Finance, 19(2), 255-271.

Reisen, H. (1998). Sustainable and excessive current account deficits. OECD Development Centre, Technical Paper, No. 132.

Roseneweig, J.A., & Tallman, E.W. (1993). Fiscal policy and trade adjustment: Are the deficits really twins? Economic Inquiry, 31, 580-594.

Rubin, R.E., Orzag, P.R., & Sinai, A. (2004). Sustained budget deficits: Long-run U.S. economics performance and the risk of financial and fiscal disarray. Paper presented at the AEA-NAEFA Joint Session, Allied Social Science Associations Annual Meetings, The Andrew Brimmer Policy Forum, “National Economic and Financial Policies for Growth and Stability,” San Diego, CA.

Said, S.E., & Dickey, D.A. (1984). Testing for unit root in autoregressive-moving average of unknown order. Biometrika, 71, 599-607.

Schwert, G.W. (1987). Effects of model specification tests for unit root in macroeconomic data. Journal of Monetary Economics, 20, 73-103.

Summers, L.H., (1988). Tax policy and international competitiveness. In J. Frenkel (Ed.), International Aspects of Fiscal Policies (pp. 349-375). Chicago: Chicago UP.

Toda, H.Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressive with possibly integrated processes. Journal of Econometric, 66, 225-250.

Vamvoukas, G.A. (1997). Have large budget deficits caused increasing trade deficits? Evidence from a developing country. Atlantic Economic Journal, 25(1), 80-90.

Wheeler, M. (1999). The macroeconomic impacts of government debt: An empirical analysis of the 1980s and 1990s. Atlantic Economic Journal, 27, 273-284.

Zietz, J., & Pemberton, D.K. (1990). The US budget and trade deficits: A simultaneous equation model. Southern Economic Journal, 57, 23-34.