Old Wine in New Bottles: Testing the Keynesian Preposition of Twin Deficit in Case of Pakistan

Abstract

In this endeavor an attempt has been made to investigate the linkage between the current account deficit and budget deficit in Pakistan in order to test the validity of the Keynesian stance, which states that there is positive and significant relationship between the said variables. Autoregressive distributed lag model (ARDL) is used for the robustness of long-run relationship between current account deficit and budget deficit in the presence of control variables. For short run dynamics ECM (Error Correction mechanism) has applied. To test the validity of the Keynesian proposition and the Ricardian equivalence in the case of Pakistan multivariate Granger causality test developed by Toda and Yamamoto (1995) has applied. The empirical analysis in this paper partially supports the Keynesian view that there is a positive relationship between current account deficit and budget deficit In terms of policy implication it is recommended that any policy measures to reduce the budget deficit in Pakistan could well assist in reducing the Pakistan’s current account deficit, which will ultimately leads to sustain economic growth.

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