Testing the twin-deficits hypothesis and Feldstein-Horioka puzzle in Egypt during the period 1974-2018

Document Type : Original Article

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Associate professor of Economics Faculty of Economic Studies and Political science Alexandria University

Abstract

The purpose of this paper is to test the twin-deficits hypothesis and the Feldstein-Horioka puzzle in Egypt during the period 1974-2018. Feldstein and Horioka (1980) postulate that if there is perfect capital mobility, correlation between domestic investment and savings should be very low. The results of the study rejected of the twin-deficits hypothesis, which is based on the existence of a positive relationship between the two deficits extending from the budget deficit to the current account deficit. However, the results confirmed the opposite, which is the existence of a long-term relationship between the two deficits, in which the current account deficit creates a budget deficit. As for the Feldstein-Horioka puzzle, the results confirmed the rejection of this puzzle in Egypt, as a large proportion of domestic investment was financed from foreign sources in light of the liberalization of foreign capital flows in Egypt.

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