Fiscal deficit and trade deficit nexus in Pakistan: An econometric inquiry

In: Panoeconomicus: naučno-stručni časopis Saveza Ekonomista Vojvodine ; scientific-professional journal of Economists' Association of Vojvodina, Band 68, Heft 5, S. 745-763

Open Access

Abstract

This study is an attempt to explore the short-term and long-term effects of
the fiscal deficit along with other macroeconomic variables on the
deteriorating trade deficit of Pakistan from 1980 to 2018 by using time
series estimation techniques. The result of the autoregressive distributed
lag (ARDL) bounds testing approach and error correction term revealed the
existence of cointegration among variables of interest. The estimated
long-run and short-run results of the ARDL approach showed a significant
positive effect of fiscal deficit on Pakistan's trade deficit in the
short-run, whereas a significant adverse effect is observed in the long-run.
The findings validated the twin deficit hypothesis in the short-run, whereas
twin divergence proposition is observed in the long run. The study suggests
prudent fiscal and monetary policies to make macroeconomic conditions
favorable for the development and competitiveness of domestic production
sectors engaged in the international trade.