Correlation of Macroeconomic Variables with Twin Deficit in Pakistan

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 time period. The core objective of the paper to investigate the relationship among the twin deficit hypothesis and major macroeconomic variables (Gross domestic product, Foreign Direct Investment, money supply, and interest rate). The results of the study founded 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 short period along with long-run period Pakistan faced twin deficit situation due to positive association of current account deficit and Budget deficit. The outcomes of the study also indicate that GDP and FDI have positively long-run association while money supply and rate of interest have 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.