At the Crossroad : Twin Deficits in the Asian Crisis-affected Countries

Lau, Evan and Shazali, Abu Mansor and Puah, Chin Hong (2007) At the Crossroad : Twin Deficits in the Asian Crisis-affected Countries. In: Oxford business & Economics Conference, Oxford University, UK, 24-26 June 2007.

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Abstract

Casual observation suggests that the twin deficit hypothesis accurately captures the US experience in the 1980s and the first few years of the new century, the twin deficits are back (Frankel, 2006). With this development, this paper analyzes the two deficits in the Asian crisis-affected countries (Asian-5: Indonesia, Korea, Malaysia, the Philippines and Thailand). Empirical results suggest that the Keynesian view fits well for Malaysia, the Philippines (pre-crisis) and Thailand. For Indonesia and Korea the causality runs in an opposite direction while the empirical results indicate that a bi-directional pattern of causality exists for the Philippines in the post-crisis era. From these results, we have demonstrates that the twin deficit phenomenon is not universally accepted and appears to be country specific. As these countries are on the crossroad in the aftermath of the 1997 crisis, managing these deficits are indeed important policy option in promoting the macroeconomic stability and sustainability in the region.

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