The Effect of the Twin Deficits on the Foreign Debt in Jordan: An Econometrical Study

Abstract

This study aims to investigate the effect of the Twin Deficits, i.e., government budget deficit, and current account deficit, on the foreign debt in Jordan during the period 1977-2004. A five-variables cointegration analyses was employed in the study. The study used the outstanding foreign debt as the dependent variable, and a set of explanatory variables which are: budget deficit, current account balance, saving gap obtained by subtracting the net domestic saving from gross fixed capital formation, and external aid. Dicky-Fuller and Phillips-Perron Unit Root Tests were used to examine the integration order of the variables. Furthermore, the Johanson Cointegration Test was also used. In addition, and in order to consolidate the results, the dynamic relationships among variables were examined by applying the variance decomposition of foreign debt. The results of the study were found to be compatible with previous studies in this domain indicating that the four explanatory variables contribute to about 85% of the accumulated foreign debt of Jordan. The variables could be ranked according to their importance in explaining the outstanding foreign debt in Jordan as follows: the budget deficit, the current account deficit, the saving gap, and finally the size of external aid.