Twin Deficits in Light of Monetary and Financial Variables, Economic Growth and Trade Openness: The Case of Jordan

Khaled M. Al-Sawai, Anwar A. Al-Azzam

Abstract


This study investigates relationships among current account deficit, budget deficit, investment, trade openness and other Jordanian macroeconomic variables by using autoregressive distributed lag model (ARDL) during the period of 1975-2010. The results show that such variables move together in long-term relationships. The analysis supports the Keynesian viewpoint in that there is a connection among current account, budget deficit and investment; Which says there is a positive correlation between the budget deficit and the balance of trade deficit, and a causal relationship from the first to the second, and that the budget deficit is causing the trade deficit; the negative coefficient of investment (less than 1) indicates that there is a hypothesis of Feldstein-Horioka, and that Jordan is integrated with global capital markets. It has been found that trade openness increases the current account deficits. Moreover, monetary policy increases current account deficit, while the real effective exchange rate has played a significant role in reducing such deficit. However, a real economic growth has no impact on the deficit. Finally, the study presents some strategies to achieve stability of the account current deficit in Jordan.

Keywords


Twin deficit, structural change, unit roots, bound testing approach, autoregressive distributed lag (ARDL), Jordan

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