Abstract Despite extensive research on the Twin Deficit Hypothesis (TDH), its relevance to South Asia remains underexplored. This study examines the fiscal-external balance nexus in eight South Asian economies from 1990–2024, with particular attention to the moderating roles of capital flows and global crises. It addresses two key questions: how remittances and foreign direct investment (FDI) shape the transmission of fiscal deficits to current account balances, and whether crises intensify this linkage. Three hypotheses are tested: (H₁) fiscal deficits worsen current accounts, (H₂) remittances provide stronger mitigation than FDI, and (H₃) debt-vulnerable economies face amplified effects during crises, especially post-2008. Using panel ARDL and Driscoll-Kraay estimators, the results reveal three main insights. First, remittances consistently stabilize current accounts, with a 1% of GDP increase improving balances by 0.25–1.31 percentage points, regardless of fiscal stance. Second, fiscal deficits significantly worsen external balances only under crisis conditions, with COVID-19 amplifying the fiscal effect by 37%, indicating a nonlinear, crisis-contingent TDH. Third, while FDI inflows initially strain current accounts through import-intensive investments, this effect neutralizes over time. These findings challenge Ricardian equivalence in South Asia and highlight the importance of strengthening remittance channels, screening FDI for export linkages, and adopting crisis-responsive fiscal frameworks.
Masud et al. (Thu,) studied this question.
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