Testing the Triple Deficit Hypothesis: The Case of The Jordanian Economy

Abstract

Jordan faces a chronic deterioration in its Budget Balance (BB), Current Account Balance (CAB), and Private Saving-Investment Gap (PSGAP). This poses a significant threat to economic stability, growth, employment, and future generations in Jordan. This study assesses the Triple Deficit Hypothesis (TDH) validity in Jordanian economy, an extension of the twin deficit hypothesis incorporating the saving-investment gap. By using annual time series data from 1980 to 2022, Granger Causality has been conducted, indicating that the TDH is not valid for Jordan, as the test results show one-way causality from BB to CAB, another from PSGAP to CAB, and a two-way causality between BB and PSGAP. In addition, the study Employed the Fully Modified Ordinary Least Squares (FMOLS) method, which identifies a statistically significant positive relationship between CAB and BB, supporting the twin deficit hypothesis in Jordan. Furthermore, a statistically positive relationship between CAB and PSGAP is found. Two dummy variables were combined, (DI) for the IMF-supported programs and (D2) for pegging the dinar exchange rate to the US dollar to measure the impact of each on the CAB. Results indicate a positive but statistically insignificant effect of the IMF’s programs, contrasting with a positive and statistically significant effect attributed to exchange rate pegging.