American Journal of Applied Sciences

Budget Deficits and Current Account Deficits in the Philippines: A Casual Relationship?

Mosayeb Pahlavani and Ali Salman Saleh

DOI : 10.3844/ajassp.2009.1515.1520

American Journal of Applied Sciences

Volume 6, Issue 8

Pages 1515-1520

Abstract

Problem statement: The problem of budget deficits and current account imbalances has attracted serious consideration from academics and policy-makers in both developed and developing countries. The question is whether such relationships between budget deficits and current account deficits exist in the case of Philippines. Approach: The purpose of this study was to test the validity of the Keynesian proposition and the Ricardian equivalence hypothesis with respect to the direction of causality between budget deficits and current account deficits in the case of the Philippines. Testing procedure was applied to data from that country for the period 1970-2005 to test such relationships. Results: A bi-directional causality between budget deficits and current account deficits was found. This finding was plausible, given the economic crisis in the early 1980s which was associated with economic driven foreign debt in the Marcos era. Conclusion: The results suggested that policy measures to reduce the budget deficit could play an important role in reducing the current account imbalances and vice-versa.

Copyright

© 2009 Mosayeb Pahlavani and Ali Salman Saleh. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.