Twin Deficit Hypothesis Under Different Exchange Rate Regimes in Pakistan: Structural Breaks Approach

This study examines twin deficit hypothesis (TDH) in the presence of structural breaks in Pakistan. ZA and LM unit root tests are used to test the stationarity while for cointegration ARDL and Gregory and Hanson tests are used. The empirical findings indicate that conventional cointegration test is supported by the Ricardian equivalence in Pakistan. While Gregory and Hanson test reinforce the twin deficit hypothesis in the presence of one structural break. The break dates reflect the combined effect of the global financial crisis, floods, and fiscal restructuring which plausibly altered the twin deficit hypothesis. Therefore, to overcome the dilemma of twin deficits government may introduce tax reforms, follow export-oriented policies, and decrease its expenditures.