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Abstract Objective of the study The main objective of this study is to test the validity of the hypothesis which clearly address that the imbalances in the public budget induce more deficits in the current account balance to attain these results Autoregressive Distributed Lag Model could be employed. There are also numbers of sub-objectives of this proposed study. First, discuss the theoretical basis for the possible links between the budget deficit and the current account deficit. Second, explain and trace the causes and direction of budget balance and current account balance in Egypt over the period of study (1980-2017). 6- Methodology The study methodology depends on the inductive approach by using the analytical descriptive method and quantitative analytical method (econometric) to study the relationship between budget deficit and current account deficit in the Egyptian economy over the past few decades. Theoretically, the degree of association between the budget and the current account deficit has received many attentions in various respects and suggesting different explanations. All these possible relationships between these two deficits necessitate an empirical study for ascertaining the nature of ’causal relation’ between budget deficit and trade deficit. Consequently, the present study is devoted to address this issue. But , a different model will be applied which is the Autoregressive distributed lag (ARDL) model in order to test the relationship between the public budget deficit and the current account deficit in long run and short run. Additionally a Granger causality test is employed in order to determine the direction of the relationship. These models will be estimated using yearly datasets collected from the World Bank indicators and various publications of the central bank of Egypt over the period 1980-2016. The results of the cointegration analysis using ARDL estimation procedure shows that budget deficit and current account deficit are cointegrated whether in the long run or in the short run . For instance according to the ARDL bound test, the calculated f-statistics value is higher than the upper bound value which indicates that there is long run cointegration between the variables. Similarly the long run coefficient indicates that there is appositive relationship between the variables which confirmed by the calculated Error correction term that resulted in negative and significant. As regarded the Granger causality test presented in this chapter, assured the invalidity of the Double ( twin) deficit hypothesis while in contrary a current account targeting hypothesis has been valid in the case of Egypt. |