Does Korea have twin deficits?

Abstract

Using the modified Wald test suggested by Toda and Yamamoto (1995 Toda, HY and Yamamoto, T. 1995. Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66: 225–50. [Crossref], [Web of Science ®] , [Google Scholar]), the study examines whether higher budget deficits lead to greater current account deficits in Korea. This test allows one not only to examine the general validity of twin deficits hypotheses, but also to predict future Korean external balance positions. The empirical results indicate that a unidirectional causal relation running from the current account deficit to the budget deficit is present in Korea.