The relationship of budget & current deficit as a macroeconomic variable: The case of emerging markets

WOS: 000281883100004The relationship of budget & current deficit as a macroeconomic variable: The case of emerging markets The simultaneous deficit of budget and current account is called "twin deficit". In economic literature there are two basic economic views that try to explain the evolution of twin deficit: Traditional Keynesian Hypothesis and Ricardian Equivalence Hypothesis. The traditional Keynesian Hypothesis suggests a positive relationship between these two deficits but the Ricardian Equivalance Hypothesis suggests no relation. In this study, the theoretical relation between budget and current deficits is tested by using the Holtz-Eakin, Newey and Rosen 's panel casuality test with the annual data of 12 emerging markets countries for 1991-2007 period. The findings support the Traditional Keynesian Hypothesis. According to the results of the panel casuality test, there is a two- way casuality relation between budget and current deficit in 12 emerging markets countries for 1991-2007 period