The effect of budget deficit on current account deficit: Evidence from Iran

Abstract

The main objective of this paper is to present the theoretical argument of twin deficit hypothesis. In this study we evaluate the effect of budget deficit on current account deficit in Iran in the period of 1981-2012. For this purpose, we using generalize method of movement (GMM) approach. In this paper we use Keynesian and Ricardian Theory about budget deficit. We find that the coefficient of budget deficit, equal 0.09 which shows that a unit of increase in budget deficit leads to 0.09 unit decrease in current account balance, indeed one unit increase in budget deficit leads to increase in current account deficit. Also, the results show that there is positive and significant relationship between the oil revenue and current account balance. But the results show that real exchange rate dose not significant effect on current account balance.

Keywords: Budget deficit, Current account deficit, Keynesian approach, GMM model.