Empirical Investigation of the Twin Deficits Hypothesis: The Egyptian Case (1990-2012)

This paper investigates the relationship between current account and government budget balances. We tested the validity of the Twin Deficits Hypothesis (TDH)in Egypt, using annual time series data for the period (1990-2012). We rejected the TDH, as granger causality tests proved a reverse causal relationship running from the current account deficit to the budget deficit. A "twin divergence" was found to exist between the two deficits in the short run, also the Vector Error Correction Model (VECM) proved the existence of a negative long run equilibrium relationship between both current account and government budget balances, with a relatively high speed of adjustment toward the equilibrium position; as it takes about one year and 4 months to restore the equilibrium position after divergence occurs.