Graduate School of International Studies Ajou University
The main purpose of the study is to explore any possible causal relationship between budget deficit and current account deficit. In this purpose, we use exchange rate as third variable with the data span of 1980-2011 and VECM model is applied. Test results show that there exists unidirectional causation linkage running from budget balance to current account balance, which indicates that twin deficits exist in Nepal. Based upon this empirical finding, it is suggested that the internal productive capacity enhancement is the only sustainable way to address the twin deficits problem of Nepal.