Testing the twin deficit hypothesis for resource-rich economies in the era of climate change

ABSTRACT

Burning fossil fuels emits greenhouse gases, the primary culprit of human-induced global warming and climate change. It is appropriate to revisit the twin deficit hypothesis with an extended data set and increasing evidence on the gravity of climate change. This study tests the twin deficit hypothesis for 18 resource-rich countries by employing annual data from 1991 to 2020. Employing panel unit-root tests, specifically, using an extension of the Granger causality test for heterogeneous panels, the findings of this study show that causality runs from the current account balance to the fiscal balance for 18 resource-rich countries. However, the sequential panel selection approach (SPSM) indicates that the stationarity of the current account balance (or budget balance) in a select few countries, including Equatorial Guinea, Kuwait, Iran, and the United Arab Emirates, is the only reason why the unit root null was rejected. We have discovered a bidirectional link for these four resource-rich nations, partially confirming our main hypothesis. This prompts us to test each of the four countries separately, and only the United Arab Emirates concurs with our primary claim. This unidirectional causality from the current account deficit to the budget deficit has policy implications for the United Arab Emirates.

KEYWORDS:

• Twin deficit hypothesis
• current account balance
• fiscal balance
• panel unit-root tests

JEL CLASSIFICATION:

• C87
• F43
• H62

Disclosure statement

No potential conflict of interest was reported by the authors.