Re-visiting budget and trade deficit in Lebanon: a critique

This study re-examines the reletionship between the budget deficit and the trade deficit in Lebanon during 1970-2004. In contrast to earlier studies, we test for a unit root in the presence of structural change using the innovational outlier (IO) model. We also utilize the newly proposed autoregressive distributed lag (ARDL) approach to examine this relationship. The endogenously determined break times coincide with observed real events which occurred during the Lebanon Civil War and after the Israeli invasion of Beirut in 1982. The results show that the trade deficit in Lebanon has a long-run impact on the budget deficit.