TWIN DEFICITS HYPOTHESIS: THE CASE OF PAKISTAN 1972-2008

Pakistan represents a valuable case study for investigating the dynamics of steadily high rates of budget and current account deficits. In this study an attempt has been made to empiricallytest the validity of Twin deficits hypothesis for Pakistan using annual time series data for the period 1972 to 2008. The co integration results indicate the long run relationship between thebudget deficit and current account deficit while the Granger causality running from current account to budget deficit. So the twin deficit hypothesis is accepted by rejecting Ricardianequivalence hypothesis. Pakistan is a non Ricardian economy facing twin deficits.