Beruflich Dokumente
Kultur Dokumente
SUBMITTED TO;
Dr. EATZAZ AHMED
BY
SYED MUHAMMAD ABDUL REHMAN SHAH
M.Sc Eco (2007-09)
DEPARTMENT OF ECONOMICS
QUAID-E-AZAM UNIVERSITY ISLAMABAD
PAKISTAN
With the Name of ALLAH
Contents
Section 1: Introduction
Section 2: Methodology
Section 5: Conclusion
References
Validity of Twin Deficits Hypothesis
in Pakistan (1980-2007)
Introduction:
Pakistan. In long run these deficits are root cause to each of the ills of our
due to budget deficit there exists high interest rate and it leads to the
channel we can explain the hypothesis of the Twin Deficit in the case of
Pakistan. Not only LDCs,but DCS also faced this severe problem that create
The aim of this paper is to investigate this Twin Deficit Hypothesis in the
deficit on the other is more significant in yearly data than in quarterly data.
( Kulkarni, )
different techniques.
explained in a good way that is used by different articles ( Aqeel and Nishat
Y= C + I + G + X – M (1)
CA = Y – (C + I + G) (2)
Where (C + I + G) are the spending of domestic residents
S = I + CA (3)
Sp = Y – T – C (4)
Sg = T – G (5)
Sp = I + CA + (G-T) (6)
Now by rearranging this equation (6) there the relationship between budget
CA = S(Private)–I – (G – T) (7)
by (G–T).
Investment and in such a way S-I remain same, then as a result there occurs
exists high interest rate and it leads to the demand for home currency rise
and results the appreciation of currency rate that is a cause of trade deficit
because cheaper import and more expensive exports are pushing the trade
budget deficit due to tax cut. Ricardians believe that due to tax cut an
individual does not feel better off because he expects future tax burden imposed
by government to retire the debt which was get to finance the tax cut. So
according to them there no change occurs in major economic variables like
investment. Keynesian say that a tax cut budget deficit policy affects the
burden and now increasing consumption. This will reduce national savings,
increase current account deficit and also will affect all macro linkages between
increases & the rate of interest increases, that becomes a cause to foreign
capital inflow. This will appreciate the value of the domestic currency that
results in cheaper imports and expensive exports. So there Trade deficit occurs
that begins from government budget deficit thus Twin deficit occurs there.
3: Literature Review:
About Twin Deficit Hypothesis there are different articles and research
papers that are focused mainly by two different point of views (1)
1st one says that due tax increase or tax cut there is clearly change
relatively cheaper and exports are relatively expensive, in this way current
Abell, 1990)
change in major all major economic variables mentioned in 1st one so there
is not any kind of relationship between budget deficit and (Aqeel and Nishat
trade deficit came to be the cause of budget deficit as it is proved in the case
some countries there is not found even unidirectional causality in the study
There are often used Granger Causality Tests and VAR technique
to investigate the twin deficit hypothesis and its direction. At stationary data
have a basic and deep understanding of the topic that can be easily
In this article the annual data set of the period (1980 to 2007) is used to
investigate the validity of twin deficit hypothesis in Pakistan. There used four
variables:
ways:
BD→IR→ER→TB
.15
.10
.05
.00
-.05
-.10
-.15
1 2 3 4 5 6 7 8 9 10
R e s p o n s e o f L T D to L B D
.2
.1
.0
-.1
-.2
-.3
1 2 3 4 5 6 7 8 9 10
.2
.1
.0
-.1
-.2
1 2 3 4 5 6 7 8 9 10
.4
.3
.2
.1
.0
-.1
-.2
-.3
-.4
1 2 3 4 5 6 7 8 9 10
.2 .2 .2 .2
.1 .1 .1 .1
.0 .0 .0 .0
-.1 -. 1 -. 1 -. 1
-.2 -. 2 -. 2 -. 2
-.3 -. 3 -. 3 -. 3
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of LIR to LBD Response of LIR to LIR Response of LIR to LER Response of LIR to LTD
.4 .4 .4 .4
.3 .3 .3 .3
.2 .2 .2 .2
.1 .1 .1 .1
.0 .0 .0 .0
-.1 -. 1 -. 1 -. 1
-.2 -. 2 -. 2 -. 2
-.3 -. 3 -. 3 -. 3
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of LER to LBD Response of LER to LIR Response of LER to LER Response of LER to LTD
. 12 .12 .12 .12
-. 0 4 -. 0 4 -. 0 4 -. 04
-. 0 8 -. 0 8 -. 0 8 -. 08
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of LTD to LBD Response of LTD to LIR Response of LTD to LER Response of LTD to LTD
.4 .4 .4 .4
.3 .3 .3 .3
.2 .2 .2 .2
.1 .1 .1 .1
.0 .0 .0 .0
-.1 -. 1 -. 1 -. 1
-.2 -. 2 -. 2 -. 2
-.3 -. 3 -. 3 -. 3
-.4 -. 4 -. 4 -. 4
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Real Overall IR
effective Deficit
exchange As % of
rate
index
(2000 =
100) GDP
ER BD IR TD
1980 188.6825 6.3 8.97
1981 213.7525 5.3 8.61 8.7
1982 195.7975 5.3 9.86 10.3
1983 189.1025 7 8.69 9.3
1984 193.1117 6 8.1 9.4
1985 180.3475 7.8 9.13 11
1986 148.8275 8.1 7.26 8
1987 131.6008 8.2 6.26 5.1
1988 129.5558 8.4 6.27 5
1989 121.2667 7.4 6.34 5.9
1990 117.3733 6.5 6.77 4.9
1991 116.0483 8.7 7.12 3.3
1992 114.3933 7.4 7.36 4.8
1993 113.9958 8 9.81 6.1
1994 111.4392 5.9 9.18 3.4
1995 110.7217 5.6 10.33 3.7
1996 107.2792 6.5 11.16 4.9
1997 108.7875 6.4 12.97 5.7
1998 106.7425 7.7 12.23 2.4
1999 99.4875 6.1 7.84 2.8
2000 100.0008 5.4 8.52 2.4
2001 91.4775 4.3 8.96 2.1
2002 94.77833 4.3 6.74 1.7
2003 91.78333 3.7 4.23 1.3
2004 91.11167 2.4 1.86 3.3
2005 94.04917 3.3 4.34 5.5
2006 4.3 6.83 9.5
2007 4.3 8.89 9.4