The relationship between twin deficit and stock market: An ARDL approach from Pakistan

Current study examines the relationship of twin deficit with stock market for Pakistan from 1992 to 2012.The results of ADF test shows that variables are not integrate at same order; hence, ARDL approach is used to examine the long run relationship among variables. The result of bound test rejects the null hypothesis of no Cointegration among variables and long run model shows positive relationship of twin deficit for Pakistan. In short run the results remain same and disequilibrium in short run is adjusted rapidly back towards long run. The positive and significant relation of twin deficit with stock market for Pakistan is due to high development expenditures, increasing debt level, and incoming of foreign aid and assistance. Government must adopt solid tactic to cut down its expenditures and utilized scare resources to reduce twin deficit, as stock market of Pakistan is highly volatile.