Cointegration Analysis of Triple Deficits: An Indicator Saturation Approach

Abstract

The objective of this study to examine the econometric technique of the triple deficit’s hypothesis in the existence of multiple structural breaks. Triple deficit theory is a put forward by expanding the twin deficit theory, to recognize the private deficit together with the trade deficit and budget deficit and to investigate the relationship among these under the Keynesian approach. The annual time series data has been used from 1975 to 2020. This study has applied econometric techniques that captured the impact of multiple structural breaks in the series. In this study we used the saturation approach (impulse indicator saturation and step indicator saturation) for multiple structural breaks and equilibrium correction model (EqCM) for cointegration analysis. Results concluded that in the static equilibrium correction model there has been a positive relationship between fiscal-deficit, private deficit, and trade-deficit in the existence of multiple breakpoints. In the dynamic equilibrium correction model, there exists a positive relationship both in (short-term and long-term) between budget-deficit, private deficit, and trade deficit in the presence of three-step indicators. Therefore, to control the deficits government should make such type of policies that mitigates the effects of structural breaks, and this will atomically reduce the adverse effects of shocks to the trade sector and financial sector.