Dynamics of fiscal and current account deficits in Thailand: an empirical investigation

Abstract

Purpose -The purpose of this paper is to contribute further on the twin deficits debate in a developing economy. Design/methodology/approach -The data for Thailand over three decades are used as a case study. Findings -The major findings are: first, a stable, long-run equilibrium relationship between fiscal deficit, interest rate, exchange rate, and current account was found. Second, the causal relationship between the two deficits runs from fiscal deficit to current account deficit. This evidence is supportive of the twin deficits hypothesis. Further econometric analysis reveals that the two financial variables (interest rate and exchange rate) act as intermediating variables -that is an increased fiscal deficit causes interest rate to rise, and this in turn puts pressure on the exchange rate. The appreciation of the domestic currency causes a current account deficit. Originality/value -The paper is of value by showing both direct and indirect channels to uncover the twin deficits phenomena. Based on a persistent profile response, it was found that the adjustment process may take as long as a year to complete.

Dynamics of Current Account Deficit: A Lesson from Pakistan

“…On the other hand, Pakistan is mostly importing necessary commodities so depreciation in exchange rate increase the import prices, leading to a worsening trade balance and this will lead to current account deficit. Baharumshah and Lau (2007), Kwalingana and Nkuna (2009) GDP. In last three decades Pakistan is continuously having problem of investment gap and this gap is fulfilled by external debt.…”

“…2 According to Keynesian absorption theory, an increase in fiscal deficit would increase domestic absorption and hence imports, and the expansion of imports leads to the worsening of current account deficit. 3 1 Information is gather from official website of ministry of finance of Pakistan: www.finance.org.pk 2 Mundell (1963) & Fleming (1962 3 Khan & Knight (1983) Baharumshah & Lau (2007) Most of the studies have been conducted under saving-investment approach. 4 Saving-Investment approach states that the current account balance is the difference between the national savings and investments.…”

Emerging Markets and Financial Resilience

“…Over the past three decades, the twin deficits hypothesis (TDH) -that budget deficit has a direct effect on current account deficit -has been a topic of interest in the empirical literature (see, for example, BahmaniOskooee, 1995; Khalid & Guan, 1999;Mohammadi, 2004;Bagnai, 2006;Salvatore, 2006;Bartolini & Lahiri, 2006;Baharumshah & Lau, 2007;Ito, 2009;Daly & Siddiki, 2009). The causal link between public budget deficit and current account balance has been analyzed extensively in the recent literature, largely because of its implications for long-term economic progress.…”

The Relation Between Fiscal and Current Account Deficits: The Case of Fragile Five

“…Darrat (1988); Bahmani-Oskooee (1991); Abell (1990); Rosenweing and Tallman (1993); Vamvoukas (1997);Fidrmuc (2003); Pattichis (2004); Saleh et al (2005); Baharumshah and Lau (2007) and Bagheri et al (2012) support the twin deficits hypothesis in the international literature. In latter studies, Mankiw (2006) and Elwell (2008) explain the relation between government expenditures and trade deficit by using the well-known saving -investment identity approach.…”