The Fiscal and Current Account Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh

This paper aims to analyze the possibility of the twin deficits hypothesis existing in the context of Bangladesh using annual data from 1980 to 2017. Vector Error-Correction approach is tapped to estimate the short and long run coefficients while the pairwise Granger causality analysis is employed to understand the long run causal associations. The results suggest that budget and current account balances in Bangladesh behave as distant cousins rather than twins as perceived from a reverse causality that is found to be stemming from budget deficit to current account deficit. Moreover, budget deficit is found to deteriorate the national trade balance in Bangladesh.