Assessing the triple deficit hypothesis in G-7 and D-8 countries: an evidence from heterogeneous panel methods

The paper empirically investigates the validity of the twin and triple deficit hypothesis for G7 and D8 countries over the period of 1990–2020. The study employs PMG (pooled mean group) and MG (Mean Group) estimation methods for investigating the impact of fiscal deficit (FD) and saving-investment gap (SIG) on current account deficit (CAD) as the slope heterogeneity test rejected the null hypothesis of homogenous slope coefficients for the G7 and D8 countries. The study also employs a CCEPMG (common correlated effect pooled mean group) and a CCEMG (common correlated effect mean group) estimation methods as cross-sectional dependence (CSD) test statistic rejects the null hypothesis of the cross-sectional independence for both G7 and D8 countries. The results for D8 and G7 countries are not providing an evidence for the twin and triple deficit hypothesis in both LR (long run) and SR (short run). In general, the CCEPMG result shows twin divergence between FD and CAD for D8 in the short run; however, the finding shows that the impact of FD on CAD is positive and insignificant for D8 countries in LR. Further, the CCEPMG result traces twin divergence between fiscal deficit and current account deficit for G7 countries in both the short-run and long-run; however, the negative impact of FD on CAD is insignificant. The results show that SIG leads to significant increase in CAD in SR and the effect is also significantly positive in the LR for both G7 and D8 countries.