Article | Open Access | Published: 21 July 2020

Correlation of Macroeconomic Variables with Twin Deficit in Pakistan

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Abstract:   The macroeconomic term Twin deficit is intensive of the study, which refers to a situation when in an economy both current account and the budget deficits are running at the correspondent period. The core objective of the paper to investigate the relationship between the twin deficit hypothesis and major macroeconomic variables (Gross domestic product, Foreign Direct Investment, money supply, and interest rate). The results of the study were found through the secondary time series quarterly data from 1992-2018 of Pakistan?s economy. In the study to examine the stationary of data, applied Augmented Dickey-Fuller test and then used Vector Error Correction and Johansen co-integration Model to examine the short and long-term relationship among observed variables. The core finding of the study was that in a short period along with a long-run period Pakistan faced a twin deficit situation due to the positive association of current account deficit and Budget deficit. The outcomes of the study also indicate that GDP and FDI have a positive long-run association while money supply and rate of interest have a negatively long-run association with twin deficit. These results of the study are very helpful for the decision-making and implementation of fiscal, monetary, and export policies in Pakistan.

Keywords:   Twin deficit, Macroeconomics Variables, VECM.

Publisher:   ILMA UNIVERSITY

Published:   21 July 2020


E-ISSN:   2409-6520

P-ISSN:   2414-8393

DOI:   http://doi.org/10.46745/ilma.jbs.2020.16.01.01


This is an open access article distributed under the terms of the Creative Commons Attribution CC BY 4.0 license, which permits any use, distribution, and reproduction of the work without further permission provided the original author(s) and source are credited.