Twin Deficits Hypothesis and Capital Mobility:The ASEAN-5 Perspective

This paper investigates the relevance ofthe twin deficits hypothesis (TDH) in five Association of Southeast Asian Nations (ASEAN) countries. We examine the causal relation between current account deficits, budget deficits and investments. The empirical findings may be summarised os follows. First, TDHholds only for three countries: Malaysia, Thailand and the Philippines. Tn other words, a budget deficit plays a significant role in the determination ofa current account deficit in all thethree countries. Second, the findings are in line with the widely held view that government expenditure crowds out private investment. Third, investment shows a noticeable impact on current account deficits. Finally, a high proportion ofdomestic investment isfinancedfrom international sources, which suggests that the Feldstein Horioka puzzle is less important in these emerging economies.