Twin Deficits in the Lao PDR: An Empirical Study

Abstract

In this paper, we investigate the dynamic relation between the budget deficit and the current account deficit in the Lao PDR from 1980 to 2010. We apply an approach that uses cointegration and an autoregressive distributed lag (ARDL) combined with a Granger causality within a vector error correction framework (VECM). The results disclose that a long run relation exists between the two variables. There is long run bidirectional causality between the budget deficit and the current account deficit that supports the twin deficit hypothesis and confirms the strong Granger causality between the budget deficit and the current account deficit in the Lao PDR.
Key words: Government budget deficit; Current account deficit; ARDL bounds testing; Granger causality; the Lao PDR