The Effects of Budget Deficit on Current Account: Case Study (Palestinian Territories 1996 – 2012)

Abstract

The researchers examined the effects of public budget deficit on current account in the Palestinian Territories (1996-2012). To determine the appropriate economic tools that can be used to reduce the current account chronic deficit, the nature and components of the Palestinian Authority's expenditures and revenues will be studied. Statistical analysis approach is used to illustrate the impact of public budget deficit on current account. This was implemented after checking the stationary of time series by adopting unit root test (Augmented Dickey Fuller). The study findings confirm the positive relationship between public budget deficit and current account in the Palestinian Territories. It appears that an increase in public budget deficit by one USD million will increase the current account deficit by USD 3.08 million. In addition, balance of trade deficit increased by USD 465.3 thousand when the other independent variables such as government and private investments in the model remain constant.

Which among twin deficits hypothesis, twin divergence, and Ricardian's equivalence hold in a developing country?

“…This has been found in the studies of Bernheim (1988), Celik and Deniz (2009), and Ganchev, Stavrova, and Tsenkov (2012) who employed panel data analysis to demonstrate the existence of twin deficit hypothesis. Furthermore, various econometric techniques such as OLS, cointegration, autoregressive distribution lag (ARDL), and VARs have been used to illustrate that twin deficit holds in different countries (Akosah, 2013;Aworinde, 2013;Azgün, 2012;Celik & Deniz, 2009;El-Namrouty & Saidam, 2015;Ganchev et al, 2012;Njironge et al, 2014;Ogbonna, 2013).…”