Ricardian Equivalence, Twin Deficits, and the Feldstein-Horioka Puzzle in Egypt

Abstract

Egypt has presented important budget imbalances. This paper tries to evaluate whether Egypt's public deficit has had any impact on current account imbalances, examining the validity of the twin deficit hypothesis for Egypt. We conclude for the presence of a (weak) long-run relationship between the budget deficit and the current account deficit. Yet, we reject the twin-deficit hypothesis: we found evidence in favour of a reverse Granger-causality running from the external deficit to the budget deficit. Further, we conclude against the validity of full Ricardian equivalence in Egypt and present evidence in favour of a high degree of capital mobility.