Twin Deficit Hypothesis in Selected Low Income Countries

Abstract

This study expressed the association between fiscal deficit and current account deficit in low income countries (LIC) by using the panel data for the period from 2000 to 2016. The augmented Dickey Fuller test is applied in order to show the co-integration between the variables. The study emphases to show the association between twin deficit hypotheses. The results of the models showed that relationship between Current Account Balances (CAB), Fiscal Deficit (FD), Real Effective Exchange Rate (REER), Gross Fixed Capital Formation (GFCF), GDP Per Capita Growth (GDPPCG) and Trade. The REER has negatively affects the CAB. However, FD, GFCF, GDPPCG and trade have positive effects on the CAB. From the policy prospective, in order to decrease the fiscal deficit, the authorities should extremely follow the policy measures that would be able to decline the current account deficit.