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

This study aims to investigate the effect of the Twin Deficits, i.e., deficit of government budget, and deficit in current account, on the foreign debt in Jordan during the period 1977 – 2004. A four variables cointegration analysis with the variables: outstanding foreign debt, budget deficit, current account balance proxied by its index, and gross fixed capital formation were exploited. Dicky-Fuller and Phillips-Perron Unit Root Tests were used to examine the integration order of the variables. Furthermore Johanson Cointegration test is 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 indicate that the three independent variables contribute to about the half of the accumulated foreign debt of Jordan. However, the largest impact among these three variables was found to be for the budget deficit, followed by the current account deficit, then by the gross fixed capital formation.