Examining Twin Deficit Hypothesis Using Simultaneous Model in Pakistan

Abstract

This research is an attempt to ferret out dynamics of twin deficit
hypothesis in Pakistan using annual data from 1974 to 2018, covering
45 years. To address empirical association between fiscal deficit and
current account deficit, simultaneous model consisting of two
stochastic equations is utilized. Hausman’s simultaneity test is utilized
to check endogeneity of the variables and stationarity of the variables
is confirmed through application of Ng-Perron unit root test. 3SLS
technique is used to empirically estimate the model. Our empirical
results strongly support significant positive two way association
between fiscal deficit and current account deficit. The key policy
prescription is that there is dire urgency of coordinated and prudent
monetary and fiscal policy to overcome pitfalls of rising twin deficits in
Pakistan.