Dynamics of fiscal and current account deficits in Thailand : an empirical investigation
Purpose – The purpose of this paper is to contribute further on the twin deficits debate in a developing economy. Design/methodology/approach – The data for Thailand over three decades are used as a case study. Findings – The major findings are: first, a stable, long-run equilibrium relati...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Emerald Group Publishing Limited
2007
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| Subjects: | |
| Online Access: | http://ir.unimas.my/id/eprint/1602/ http://ir.unimas.my/id/eprint/1602/1/Ahmad%20Zubaidi%2C%20Baharumshah.pdf |
| Summary: | Purpose
– The purpose of this paper is to contribute further on the twin deficits debate in a
developing economy.
Design/methodology/approach
– The data for Thailand over three decades are used as a case study.
Findings
– The major findings are: first, a stable, long-run equilibrium relationship between fiscal
deficit, interest rate, exchange rate, and current account was found. Second, the causal relationship
between the two deficits runs from fiscal deficit to current account deficit. This evidence is supportive
of the twin deficits hypothesis. Further econometric analysis reveals that the two financial variables
(interest rate and exchange rate) act as intermediating variables – that is an increased fiscal deficit
causes interest rate to rise, and this in turn puts pressure on the exchange rate. The appreciation of the
domestic currency causes a current account deficit.
Originality/value
– The paper is of value by showing both direct and indirect channels to uncover
the twin deficits phenomena. Based on a persistent profile response, it was found that the adjustment
process may take as long as a year to complete |
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