Empirical Analysis of Twins’ Deficits in Bangladesh

Abstract

Bangladesh represents a valuable case study for investing the dynamics of steadily high rates of budget and trade deficits. In this study an attempt has been made to empirically test the validity of Twin deficits hypothesis for Bangladesh using annual time series data from 1972-73 to 2011-12 fiscal year. Applying the VAR and Granger Causality after successfully running ADF and PP unit root test and cointegration rank test this paper reveals that budget deficit Granger cause trade deficit and vice versa but the relationship does not stand for the long-run dynamics. In fact, the long run relationship depends on overall macroeconomics environment and performances of other relevant variables. Policy implication is that Government should reduce budget deficit to improve the trade account balance.