On the validity of the twin deficit hypothesis in fragile 8 countries an empirical analysis

Since the 1980s, particularly in the United States and numerous developed and emerging economies, the simultaneous occurrence of rising budget deficits and current account deficits has led to the development of the "twin deficits hypothesis." This hypothesis suggests a potential relationship between budget deficits and the balance of current accounts. When both a budget deficit and a current account deficit occur in an economy, it is referred to as a twin deficit situation. In its traditional sense, the hypothesis implies that budget deficits may lead to a deterioration in the current account balance. Essentially, budget and current account deficits tend to move in the same direction or emerge simultaneously. The concept of twin deficits has become an important macroeconomic issue that has attracted the attention of economists, politicians and academics since the 1980s. In this study, it was aimed to examine the relationship between the budget deficit and the current account deficit in the fragile eight countries (Brazil, Indonesia, South Africa, India, Turkey, Argentina, Russia and Chile). However, Russia could not be included in the study due to lack of relevant data. By analyzing data from 2002 to 2019, the study examines the validity of the twin deficits hypothesis in these economies. Analysis was performed according to the panel causality test. The findings reveal a unidirectional causal relationship from the current account deficit to the budget deficit. These results align with the Current Account Targeting view, first proposed by Lawrence H. Summers in 1988, which suggests that governments should prioritize targeting the current account balance in their economic policies, as it could have a direct effect on budget deficits. The findings indicate that, particularly in fragile economies, the current account deficit exerts a stronger influence on budget deficits, highlighting the need for these countries to reassess their trade and financing policies.