Testing Twin Deficits Hypothesis in Iran

Twin deficits hypothesis is one of the most debatable economic issues in developed and developing countries in the world during past 20 years. According to this matter, current account deficits of the countries is caused by government’s budget deficits phenomenon and the most suitable way to solve this problem and stabilize internal and external deficits is reducing the government’s budget deficit (by decreasing government expenditure or increasing taxes).In this paper, by applying statistical data related to 1959-2007 and cointegration technique in vector error correction model (VECM) the effect of current government budget deficit (government expenditure deducted from taxes) on non-oil current account deficit of Iran has been examined.The results of this study indicates that twin deficits hypothesis (TDH) is accepted against the Ricardian equivalence hypothesis (REH) which shows that the government expenditures and taxes don’t affect economic variables such as current account deficits.