Twin deficit in MENA countries: an empirical investigation

Abstract

This paper tests the relationship between current account and budget deficits in eight MENA countries using time-series data for the period 1990-2012. The paper uses cointegration analysis, error correction modelling and Granger causality test under a vector autoregression framework. The results show that the direction of causality for the MENA countries is mixed. The findings confirm that current account deficit causes budget deficit for Kuwait and Egypt, whereas the reverse causality is true for Saudi Arabia supporting the twin deficit hypothesis. The results show also that there is no relationship between two deficits for other countries supporting Ricadian equivalence hypothesis (REH).

Keywords

• Twin deficit
• fiscal deficit
• current account deficit
• Granger Causality