An Empirical Investigation of the Twin Deficit Problem and the Feldstein-Horeka Hypothesis: A Case Study of Jordan

Abstract

This study explores the correlation between budget deficits and current account deficits, as stated by the twin deficit hypothesis, in the specific setting of Jordan’s economy. The Keynesian view proposes that budget deficits lead to current account deficits, whereas the Ricardian equivalence theory disputes this idea. Additionally, the research examines the Feldstein-Horioka hypothesis from 1980 about the connection between saving and investment. By using cointegration analysis, this study demonstrates a lasting connection between budget deficits and current account deficits, providing evidence for the Keynesian perspective. The findings support the twin deficit theory’s applicability to Jordan’s economic situation and strengthen the Keynesian view on the relationship between the current account, budget deficit, and investment. Moreover, the existence of a negative correlation coefficient of less than 1 linking investment and saving supports the Feldstein-Horioka hypothesis, pointing to Jordan’s inclusion in international capital markets.