Investigating a threshold effect in Twin Deficit Hypothesis: Evidence from the BRICS Economies

Over the years, empirical evidence on twin-deficit hypothesis has been inconsistent. While some support it, others affirm prevalence of Ricardian Equivalence. This study therefore examines a nonlinear/threshold relationship between deficits among BRICS economies using Panel ARDL (1, 1) model with quarterly data spanning from 2000q1 to 2019q4. The efficient estimator PMG based Hausman test shows that twin divergence holds market up certain threshold beyond which holds. suggests countries face dampening effect fiscal/current their current account/fiscal point after further increases in either will significantly raise other. static fixed technique and second-order U-shaped reveal consistent result. speed adjustment long-run steady state for account fiscal models are 27.4 52.5 per cents respectively, at 5 cent significance level. However, higher growth shocks interest rate lead while exchange trade openness dampen it. Fiscal deepening management within bound were recommended as panacea problems.