An Investigation of Twin Deficit Hypothesis in Iran: Two Regimes Threshold Vector Autoregressive Approach

One of the most important economic problems of many developing countries is happening of the budget deficit and the current account deficit at the same time, that have adverse effects on performance of various sectors of the economy. In this study the twin deficit hypothesis in Iran was tested. For this purpose nonlinear relationship between budget deficit and current account deficit in the period of 1971-2012 was reviewed. At first, the stationary of time series variables examined. Then Johansen co-integration test was performed. There was a co-integration vector between budget deficit and current account deficit. The causality test in a frame of a vector autoregressive model showed a bi-directional causal relationship between the variables. Then the non-linearity test was performed and after confirmation of non-linearity, two regimes threshold vector autoregressive model was estimated. Also the unit root test of non-linear models (KS) was applied. The results showed that the current account deficit in the short run will be affected by budget deficit and current account deficit increase with the increasing of the budget deficit. But in the long run, these two variables are treated as independent together.