THE DUAL DEFICITS IN AN ASIAN-PACIFIC CONTEXT

Abstract

The Twin Deficits relationship has spawned numerous studies which test economies ranging from the United States to OECD countries and to developing economies such as Greece and the Latin-American countries. In this academic exercise, we test for this relationship using a sample of Asian-Pacific economies. In other words, we want to find out if budget deficits cause current account deficits and the extent to which it does so. We also review the literature in this field, define the fiscal and external balances, and discuss the theoretical linkages between the twin balances. We then review the performances of the economies in our sample, followed by the presentation of the model for our empirical analysis. Our empirical testing employs the fixed-effects model which is based on panel data methodology. This model proves to be more efficient than using ordinary least squares. We find evidence that budget deficits do indeed cause current account deficits for our Asian-Pacific sample, which implies that prudent fiscal management can be counted on to help manage the current account balance.