Cointegration Analysis of Twin Deficit Hypothesis in the Presence of Structural Breaks
Author: Ghulam Sarwar

The main objective of this study is to investigate the econometric methodology of twin deficit hypothesis in the presence of structural breaks. In case of structural breaks unit root test like ADF test does not capture the structural breaks points, thus may draw biased inferences. Perron (1989) pioneered the test of structural unit root with exogenous structural break phenomena. Secondly, Zivot-Andrews (1992) introduced the structural unit root test with endogenous structural breaks. Hence, we have applied the like Lee, and Strazicich (2003, 2004) Lagrange multiplier unit root test. This test captures the multiple structural break points in the series. The previous literature is evident with the fact that researchers employed standard and traditional econometric techniques like OLS, Johansen (1990) standard cointegration and Granger causality (1987) test, to examine the twin deficit hypothesis. However in short and long run, such techniques failed to capture the structural break points and ultimately may lead spurious results because structural breaks may alter the behaviour of the series. In literature of Pakistan we have not find any study that capture the structural break in econometric methodology which estimating the twin deficit hypothesis. To fill this gap this study will consider econometric methodology that capture the effects of structural breaks. Therefore, twin deficit phenomena is analysed by applying Johansen et al., (2000) structural break cointegration technique and considering 1987 domestic debt crisis and 1998 nuclear device test. In exogenous structural break points postulated the existence of twin deficit. Further, results are substantiated using the Gregory and Hansen (1996) residuals based structural break cointegration with single break Supervisor: Dr. Hafsa Hina

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Keywords : Econometric, Hypothesis
Supervisor: Hafsa Hina

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