Study on the Relationship Between the Current Account and the State Budget

Journal of Economics and Business

ISSN 2615-3726 (Online)

ISSN 2621-5667 (Print)

Published: 06 April 2020

Study on the Relationship Between the Current Account and the State Budget

Le Duc Hoang, Dang Ngoc Phuong Uyen

National Economics University, Vietnam

Download Full-Text Pdf


Pages: 489-502

Keywords: Current Account Balance, Budget Balance, Twin Deficits


This paper investigates the relationship between current account balance and budget balance in Vietnam using quarterly data from 1997Q1 to 2018Q1. Other explanatory variables are interest rate of government bonds and real exchange rate. The result reveals that all four variables, current account balance, budget balance, government bonds yield and real exchange rate, are co-integrated and there is one co-integrated vector relationship. Otherwises, using the Granger causality test, it is shown that, budget balance has a directional causality relationship with current account balance which means that the research supports Keynesian’s view and there are twin deficits happened in Vietnam during 1997 to 2018. In addition, there are two other directional relationships from real exchange rate to current account and current account to interest rate of government bonds. Furthermore, there are also other factors which can cause the two deficits individually.


  1. Akbostancı, Elif ve Gül İ. Tunç (2002). “Turkish Twin deficits: An Error Correction Model of Trade Balance”. ERC Working Papers.
  2. Baharumshah, Ahmad Zubaidi, Hamizun İsmail and Evan Lau (2009). “Twin deficits Hypothesis and Capital Mobility: The ASEAN-5 Perspective”. Jurnal Pengurusan.29, 15-32.
  3. Barro, R.J. (1989), “The Ricardian Approach to Budget Deficits”, Journal of
    Economic Perspectives, 3, 37–54.
  4. Bluedorn, J., & Leigh, D. (2011). Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account. IMF Economic Review, 59(4), 582-602.
  5. Cavallo, Michele. (2005). Understanding the twin deficits: new approaches, new results. FRBSF Economic Letter.
  6. Erdogan S, Yildirim D (2014) The Relationship between the Budget Deficit and Current Account Defcit in Turkey. Emerging Markets Journal 3: 80-86
  7. Evans, P. and Hasan, I. (1994), “Are Consumers Ricardian? Evidence for Canada”, Quarterly Review of Economics and Finance, 34, 25–40.
  8. Fleming, J.M. (1962), “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates”, International Monetary Fund Staff Papers, 10, 369–380.
  9. G. T. Ganchev (2010): “The twin deficits hypothesis: the case of Bulgaria”. Financial Theory and Practice 34 (4) 357-377 (2010)
  10. Hiep, L. H. (2016). Growing Fiscal Deficit Presents a Major Risk for Vietnam. Journal of ISEAS Yusof Ishak Institute.
  11. Hoang, T. L. H. (2013), “Hoàn thiện chính sách tỷ giá ở Việt Nam giai đoạn 2010-2020”, National Economic University.
  12. Holmes, Mark J. (2011) “Threshold co-integration and the short-run dynamics of twin deficits behavior”. Research in Economics. 65, 271 – 77.
  13. Investopedia. (2018). Budget Deficit. [online] Available at: [Accessed 11 Nov. 2018].
  14. Investopedia. (2018). Current Account Deficit. [online] Available at: [Accessed 11 Nov. 2018].
  15. Johansen, S. (1991), “Estimation and Hypothesis Testing of Co-Integration Vectors in Gaussian Vector Autoregressive Models,” Econometric, Vol. 59, No. 6, pp. 1551–1580.
  16. Kalou, Sofia and Suzanna-Maria Paleologou (2012). “The twin deficits hypothesis: Revisiting an EMU country”. Journal of Policy Modeling. 34, 230 – 41.
  17. Kearney, C. and Monadjemi, M. (1990), “Fiscal Policy and Current Account Performance: International Evidence on the Twin deficits”, Journal of Macroeconomics, 12, 197–220.
  18. Khalid, Ahmed M. and Teo Wee Guan (1999). “Causality tests of budget and current account deficits: Cross-country comparisons”. Empirical Economics. 24, 389- 402.
  19. Khorshed Chowdhury and Ali Salman Saleh (2007). “Testing the Keynesian Proposition of Twin deficits in the Presence of Trade Liberalization: Evidence from Sri Lanka”. University of Wollongong Economics Working Paper Series 2007.
  20. Kılavuz, Emine and Yasemin Dumrul (2012). “The validity of Twin Deficits Hypothesis: Theory and Practice”. Atatürk University, The Journal of Faculty of Economics and Administrative Sciences. 26, (3 - 4), 239 - 58.
  21. Kim, S. and Roubini. N. (2008).” Twin deficits or twin divergence? Fiscal policy current account and real exchange rate in the U.S.”. Journal of International Economics. 74, 362 – 93.
  22. Kim, Soyoung, and Nouriel Roubini. (2004). “Twin deficits or Twin Divergence? Fiscal Policy, Current Account and Real Exchange Rate in the U.S.” Mimeo, Korea University and New York University.
  23. Kinza Mumtaz & Kashif Munir (2016). “Dynamics of Twin deficits in South Asian Countries”. University of Central Punjab, Lahore, Pakistan
  24. Miller, S.M. and. Russek, F.S. (1989), “Are the Twin deficits Really Related?”, Contemporary Policy Issues, 7, 91–115.
  25. Nguyen, H. (2017). Vietnam Macro - Analysis of BOP. p.2.
  26. Nguyen, N. A., D. C. Nguyen, C. N. Nguyen, and T. H. Bui (2011), ‘Fiscal Issues in Vietnam Economy: Assessment on the Impact of Stimulus, Fiscal Transparency and Fiscal Risk’, in Ito, T. and F. Parulian (eds.), Assessment on the Impact of Stimulus, Fiscal Transparency and Fiscal Risk. ERIA Research Project Report 2010-01, pp.249-282. ERIA [online]. Available at:
  27. Nguyen, N. A., D. C. Nguyen, T. H. T. Nguyen (2011), ‘THÂM HỤT TÀI KHOẢN VÃNG LAI: Nguyên nhân và giải pháp’. [online]. Available at:
  28. Onafowora, Olugbenga A. and Oluwole Owoye (2006). “An Empirical Investigation of Budget and Trade Deficits: The Case of Nigeria”. The Journal of Developing Areas. 153 - 74.
  29. Pattichis, Charalambos (2004). “Budget and trade deficits in Lebanon”. Applied Economics Letters. 11, 105-108.
  30. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16(3), 289-326.
  31. Pham, T. T. T. (2012). The impact of exchange rate fluctuation on trade balance in short and long run. Depocen Working Paper, 12-13.
  32. Saleh, Ali Salman, Mahendhiran Nair and Tikiri Agalewatte (2005). The Twin Deficits Problem in Sri Lanka: An Econometric Analysis. South Asia Economic Journal. 6, 221 - 39
  33. Salvatore, D. (2006). Twin deficits in the G-7 countries and global structural imbalances”. Journal of Policy Modeling. 28, 701 – 12.
  34. Smyth, D. and Hsing, Y. (1995), “In Search of an Optimal Debt Ratio for Economic Growth”, Contemporary Economic Policy, 13(4), 51–59.
  35. Tung, L. T. (2018). The effect of fiscal deficit on economic growth in an emerging economy: Evidence from Vietnam. Journal of International Studies, 11(3), 191-203
  36. Ümit, A.Öznur and Kemal Yıldırım (2008). “Twin deficits Hypothesis”. İktisat İşletme ve Finans. 23, (267), 116 -32.
  37. Vamvoukas, G. A. (1999). The Twin deficits Phenomenon: Evidence from Greece. Applied Economics. 31,1093-1100.
  38. VnExpress. (2016, 7 Mar). Bộ trưởng Tài chính: 'Điều hành ngân sách như đi trên dây'
    Retrieved 8 Jun, 2016, from
  39. Volcker, P.A. (1987), “Facing Up to the Twin deficitss”, in Fink, R. and High, J. (Eds), A Nation in Debt: Economists Debate the Federal Budget Deficit, Maryland: University Publications of America.
  40. Wheeler, M. (1999), “The Macroeconomic Impacts of Government Debt: An Empirical Analysis of the 1980s and 1990s”, Atlantic Economic Journal, 27(3), 273–84

About Us

The Asian Institute of Research is an online and open-access platform to publish recent research and articles of scholars worldwide. Founded in 2018 and based in Indonesia, the Institute serves as a platform for academics, educators, scholars, and students from Asia and around the world, to connect with one another. The Institute disseminates research that is proven or predicted to be of significant influence for the general public.

Contact Us

Please send all inquiries to the email:

Business Address:

5th Floor, Kavling 507, Fajar Graha Pena Tower, Jl. Urip Sumohardjo No.20, Makassar, Indonesia 90234

Copyright © 2018 The Asian Institute of Research. All rights reserved

Stay Connected

  • Instagram - Black Circle
  • Facebook - Black Circle
  • LinkedIn - Black Circle