Budget-Current Account Deficits Nexus in Malaysia

The purpose of this study is to contribute further on the twin deficits debate in a developing economy. The data for Malaysia over four decades is used as a case study. Empirical result obtained from the Johansen-Juselius (1990) cointegration test indicates that budget deficit and current account deficit do not contain common stochastic trend in the long run. However, the findings from the Granger non-causality test by Toda-Yamamoto (1995) support the Summer‟s (1988) reverse causation proposition. This implies that a unidirectional causality running from current account to budgetary variable where the deterioration in current account deficit could worsen the budgetary position in the case of Malaysia.