Ziad M. Abu-Lila

Type of the article: Research Article

Abstract
This study aims to identify the direction of Granger predictability between fiscal deficit, saving-investment gap, and external account imbalances in Jordan over the period 1976–2024. It seeks to better understand the interaction between internal macroeconomic imbalances and external sector disequilibria and their implications for long-term economic stability. To achieve this objective, the study first applied the Augmented Dickey–Fuller (ADF) unit root test, which revealed that the variables were not integrated of the same order. This finding limited the applicability of the traditional Granger causality approach. Accordingly, the study employed the Toda–Yamamoto Modified Wald (MWald) causality test, which does not require all variables to be integrated of the same order.
The empirical findings indicate significant predictive linkages between internal and external macroeconomic imbalances in Jordan. Specifically, the fiscal deficit Granger-predicts the current account, while the saving–investment gap Granger-predicts external debt. In addition, the current account, external debt, and foreign exchange reserves jointly Granger-predict the saving–investment gap, highlighting the interconnectedness between domestic and external macroeconomic conditions. The findings suggest that the relationship between internal and external imbalances in Jordan is more complex than implied by the conventional twin-deficit hypothesis and underscore the importance of the saving–investment gap as an important link between domestic and external macroeconomic conditions. Accordingly, the findings highlight the importance of coordinated macroeconomic policies for strengthening fiscal discipline, promoting domestic saving, and improving investment.