Budget and trade deficits in Lebanon

Abstract

This study addresses one of the main problems facing the Lebanese economy during its recovery from many years of war: the relationship between budget and trade deficits. The results suggest that measures aimed at reducing the budget deficit may also lead to a reduction of the Lebanese trade deficit.

Notes

¹According to Bolbol (1999b, p. 433) the trade deficit is by far the biggest component (and cause) of the current account deficit.

²Note that in the case of two variables there can be at most, one cointegrating vector.

³The 1995 annual value of imports given in IFS appears to be incorrect. We have used the sum of the quarterly values for that year instead. This also corresponds to the 1995 value of imports made available by the Bank of Lebanon.

⁴As explained in the previous section, Lebanon was at war for most of the last thirty years and as a consequence very little data exist.

⁵All coefficients are statistically significant at the 99% level.

⁶As we have already mentioned, the optimal lag length of the ECMs was determined by the FPE criterion. To test the robustness of our causality, results we estimated ECMs with different lag lengths. These models produced identical conclusions regarding the direction of temporal causality between the variables.