Twin deficits hypothesis and feldstein-horioka puzzle in Vietnam

Abstract

This paper investigates the validity of the twin deficit hypothesis and the presence of the Feldstein-Horioka puzzle in the case of a small developing country, Vietnam. We examine the long run relationship and causality between current account balance, budget deficit and investment for the period 1990–2011. The analysis is conducted within the framework of cointegrating technique, error correction modeling and Granger non-causality test. The empirical results suggest that the twin deficit hypothesis under Keynesian proposition holds for Vietnam in both the short and long runs. The empirical results further point to the presence of the Feldstein-Horioka puzzle, indicating that Vietnam could not well-integrated into the international capital markets. Yet, investment is found to have a significant impact on the current account balance.