Document Type : Research Paper
Abstract
Current account balance and the budget balance are important macroeconomic variables that the relationship between them is one of the important questions for economic researchers over the past three decades.
The major aim of this paper is to investigate the empirical relationship between budget deficit and current account deficit.
By using panel data of 50 developing countries over the period 1999-2012 and by using three panel data methods (a two-stage least squares error component, the systematic generalized moments causality test and Dumitrescu-Hurlin) this research has been done.
Considering the other determinants of trade balance, the results of all three methods shows that the relationship between budget deficits and current account deficits were positive and significant, and therefore bilateral deficit hypothesis valid for developing countries. Therefore, because the adverse effects of the current account deficit and budget deficit, developing countries must impose higher taxes and find more tax revenues sources to achieve sustainable financing of the budget deficit and decrease volatility and current account deficit.
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