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Three Essays on Twin Deficits, Impact of Fiscal Debt on Twin Deficits and Fiscal Sustainability in the South Asian Region

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posted on 2024-11-12, 10:20 authored by Iwanthika Rajakaruna
Global debt continues to rise and has remained at a high level for some time. Governments around the world are the second biggest borrowers of finance. Following the global financial crisis (GFC) of 2008-09, fiscal sustainability is an issue dominating policy discussions in both developed and developing countries. Specifically, fiscal imbalances are regarded as one of the major risks facing the global economy. With high debt levels, policymakers face the challenges of how to reduce high debt-to-GDP ratio by choosing the correct debt corrective management tools. Hence, this thesis seeks to analyse the issue of three things - twin deficits, impact of fiscal debt on twin deficits and fiscal sustainability - in the South Asian region, fuelled by an ever-growing twin deficits and high fiscal debt-to-GDP ratio over the last five decades. In the three essays that constitute this research, we explore what are the dynamic links between the current account deficit and budget deficit, then analyse the impact of fiscal debt on twin deficits, while the third essay focuses on fiscal sustainability, fiscal debt and economic growth in South Asia. The issue of twin deficits is at the forefront of fiscal policy concerns in the South Asian region. Hence, the first essay investigates the issue of twin deficits by using a panel data vector autoregression model comprising five South Asian countries for the period 1980 to 2018. The results show that both budget deficit and current account deficit are mutually causative which is in contrast to the uni-directional causality running from fiscal deficit to current account deficit found in prior studies. In addition, this bi- causality relationship is demonstrated in the impulse response analyses; a one standard deviation positive shock in current account balance has a positive response on the budgets of South Asian economies while external balance increases to a one standard deviation positive shock in internal balance. Our findings lead us to reject ‘fiscal policy only’ recommendations to address the twin deficits issue.

History

Year

2021

Thesis type

  • Doctoral thesis

Faculty/School

School of Business

Language

English

Disclaimer

Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.

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