TESTING THE VALIDITY OF THE TRIPLE DEFICIT HYPOTHESIS (TDH): EVIDENCE FROM SOUTH ASIAN COUNTRIES

Author(s) : Saima Batool, Amanat Ali, Javed Iqbal and Bushra Parveen

Abstract:

This study aims at evaluating the validity of the “Triple (Current Account, Budget & Financial) Deficit Hypothesis (TDH)” the extension of the “Twin Deficit Hypothesis (TDH)” for the of South Asian countries i.e., (Bangladesh, India, Pakistan & Sri-Lanka) by using the panel data for the era of 2000-2021. First, the stationarity is to be tested of the “Current Account Deficit (CAD)”, the “Budget Deficit (BD,)” and the “Financial Deficit (FD)”. However, the results show that although other variables are stationary at the 1st difference I(1) except one i.e., , the CAD is non-stationary at a level I(0). All variables, however, are stationary at the 1st difference. Furthermore, the co-integration test indicates that co-integration exists among the series means that long-term association is present among the variables. The findings of the “VECM Granger Causality Test” demonstrate the existence of a two-way causal link between CAD & BD and between CAD and Financial deficit which indicates that the improvement in the current account balance (CAB) while the fiscal adjustment is not totally controlled by policy and necessitates CAD adjustment, it also demands fiscal austerity. As a result, we can draw the conclusion that the "Triple Deficit Hypothesis [TDH]" holds to the South Asian region.