Research Article
BibTex RIS Cite

Year 2021, Volume: 10 Issue: 2, 88 - 102, 30.06.2021

Abebe Aragaw

https://doi.org/10.17261/Pressacademia.2021.1407

Abstract

References

  • Adam, C. S., & Bevan, D. L. (2005). Fiscal deficits and growth in developing countries. Journal of Public Economics, 89(4), 571-597.
  • Aero, O., & Ogundipe, A. (2016). Fiscal deficit and economic growth in Nigeria: Ascertaining a feasible threshold. International Journal of Economics and Financial Issues, 8(3), 296.
  • Akosah, N. K. (2013). Threshold effect of budget deficits on economic growth in Ghana: An empirical analysis. Available at SSRN 2289523.
  • Aloryito, G. K., &Senadza, B. (2016). The twin deficits hypothesis: Evidence from Ghana. International Journal of Business and Economic Sciences Applied Research, 9(3), 55-62.
  • Anderson, T. W., & Hsiao, C. (1981). Estimation of dynamic models with error components. Journal of the American Statistical Association, 76(375), 598-606.
  • Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277.
  • Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
  • Baharumshah, A. Z., Lau, E., & Khalid, A. M. (2006). Testing twin deficits hypothesis using VARs and variance decomposition. Journal of the Asia Pacific Economy, 11(3), 331-354.
  • Ball, L., &Mankiw, N. G. (1995). What do budget deficits do? NBER working paper No. 5263
  • Baltagi, B. (2008). Econometric analysis of panel data.Chichester, UK:John wiley & Sons
  • Barro, R. (1988). The Ricardian approach to budget deficits. NBER working paper No. w2685
  • Boubtane, E., Coulibaly, D., & Rault, C. (2013). Immigration, unemployment and GDP in the host country: Bootstrap panel Granger causality analysis on OECD countries. Economic Modelling, 33, 261-269.
  • Breusch, T. S., & Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239.
  • Buchanan, J. M. (1976). Barro on the Ricardian equivalence theorem. Journal of Political Economy, 84(2), 337-342.
  • Cavallo, M. (2005). Understanding the twin deficits: New approaches, new results. FRBSF Economic Letter, Federal Reserve Bank of San Francisco issue jul22.
  • Cinar, M., Eroglu, I., &Demirel, B. (2014). Examining the role of budget deficit policies in economic growth from a Keynesian perspective. International Journal of Economics and Finance, 6(10), 191-200.
  • Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20(2), 249-272.
  • Dewald, W. G., & Ulan, M. (1990). The twin-deficit illusion. Cato Journal, 9(3), 689-707.
  • Dumitrescu, E., &Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29(4), 1450-1460.
  • Emirmahmutoglu, F., Bolat, S., & Belke, M. (2014). The Dynamic Linkages of Budget Deficits and Current Account Deficits Nexus in EU Countries: Bootstrap Panel Granger Causality Test. International Journal of Economic Perspectives, 8(2).
  • Emirmahmutoglu, F., & Kose, N. (2011). Testing for Granger causality in heterogeneous mixed panels. Economic Modelling, 28(3), 870-876.
  • Enders, W., & Lee, B. (1990). Current account and budget deficits: Twins or distant cousins? The Review of Economics and Statistics, 72(3), 373-381.
  • Erkin, B. (1988). Government Expenditure and Economic Growth: Reflections on Professor Ram’s Approach, A New Framework and Some Evidence from New Zealand Time Series Data. Keio Economic Studies, 25(1), 59-66.
  • Fatima, G., Ahmed, A. M., & Rehman, W. U. (2011). Fiscal deficit and economic growth: An analysis of Pakistan’s economy. International Journal of Trade, Economics and Finance, 501-504.
  • Friedman, B. (2005). Deficits and debt in the short and long run. NBER Working Papers 11630, National Bureau of Economic Research, Inc.
  • Gaibulloev, K., Sandler, T., & Sul, D. (2014). Dynamic panel analysis under cross-sectional dependence. Political Analysis, 22(2), 258-273.
  • Ganchev, G. T. (2010). The twin deficit hypothesis: the case of Bulgaria. Financial theory and Practice, 34(4), 357-377
  • Genevieve, G. (2020). The impact of fiscal deficit on economic growth: Using the Bounds test approach in the case of Morocco, MPRA paper 98925.
  • Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424.
  • Hsiao, C. (2006). Panel data analysis - Advantages and challenges. IEPR working papers 06.49, Institute of Economic Policy Research.
  • Im, K. S., Pesaran, M., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74.
  • Kar, M., Nazlıoğlu, Ş., & Ağır, H. (2011). Financial development and economic growth nexus in the MENA countries: Bootstrap panel Granger causality analysis. Economic Modelling, 28(1-2), 685-693.
  • Konya, L. (2006). Exports and growth: Granger causality analysis on OECD countries with a panel data approach. Economic Modelling, 23(6), 978-992.
  • Lau, E., & Tang, T. C. (2009). Twin deficits in Cambodia: Are there reasons for concern? An empirical study. Monash University, Department of Economics, Discussion Papers, 11(09), 1-9.
  • Levin, A., Lin, C., & James Chu, C. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.
  • Mankiw, N. G. (2010). Macroeconomics, 7th edition. Worth Publishers.
  • Mukhtar, T., Zakaria, M., & Ahmed, M. (2007). An empirical investigation for the twin deficits hypothesis in Pakistan. Journal of Economic Cooperation Among Islamic Countries, 28(4).
  • Ncanywa, T., & Letsoalo, T. E. (2019). Which among twin deficits hypothesis, twin divergence, and Ricardian's equivalence hold in a developing country? Journal of Public Affairs, 19(2), e1904.
  • Neaime, S. (2008). Twin deficits in Lebanon: A time series analysis. Lecture and working paper series No. 2, 2008.
  • Nelson, M. A., & Singh, R. D. (1994). The deficit-growth connection: Some recent evidence from developing countries. Economic Development and Cultural Change, 43(1), 167-191.
  • Nickell, S. (1981). Biases in dynamic models with fixed effects. Econometrica, 49(6), 1417-1426.
  • Njoroge, E. K. (2014). Testing the twin deficit hypothesis for Kenya 1970-2012.International Journal of Business and Economics Research, 3(5), 160.
  • Odim, O. U., Ngozi, O. C., & Lawrence, E. (2014). The Keynesian-Ricardian dichotomy on budget deficits in Nigeria. IOSR Journal of Economics and Finance, 5(2), 69-78.
  • Ogbonna, B. C. (2013). Twin deficits or Ricardian equivalence hypothesis: Evidence from Nigeria. Journal of Banking, 7(1), 1-48.
  • Osoro, K. O., Gor, S. O., &Mbithi, M. L. (2014). The twin deficit and the macroeconomic variables in Kenya. International Journal for Innovation Research, 2(9), 64-84.
  • Perera, A., & Liyanage, E. (2012). An empirical investigation of the twin deficit hypothesis: Evidence from Sri Lanka. Staff Studies, 41(1).
  • Pesaran, M. H. (2004). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 60(1), 13-50.
  • Pesaran, M. H., Ullah, A., & Yamagata, T. (2008). A bias-adjusted LM test of error cross-section independence. The Econometrics Journal, 11(1), 105-127.
  • Poi, B. P. (2004). From the help desk: Some bootstrapping techniques. The Stata Journal: Promoting communications on statistics and Stata, 4(3), 312-328.
  • Rangarajan, C., &Srivastava, D. K. (2005). Fiscal deficits and government debt in India: Implications for growth and stabilization. Economic and Political Weekly, 2919-2934
  • Rauf, A., & Khan, A. Q. (2011). An empirical study to find the relationship between trade deficit and budget deficit in Pakistan. Academic Research International, 1(3), 36.
  • Sakyi, D., & Opoku, E. O. (2016). The twin deficits hypothesis in developing countries: Empirical evidence for Ghana (Technical No. S-33201-GHA-1). International Growth Centre.
  • Slimani, S. (2016). Threshold effects of fiscal policy on economic activity in developing countries. International Journal of Business and Social Research, 6(3), 20.
  • Sobrino, C. R. (2013). The twin deficits hypothesis and reverse causality: A short-run analysis of Peru. Journal of Economics Finance and Administrative Science, 18(34), 9-15.
  • Swamy, P. A. (1970). Efficient inference in a random coefficient regression model. Econometrica, 38(2), 311.
  • Taylor, L., Proano, C. R., De Carvalho, L., & Barbosa, N. (2012). Fiscal deficits, economic growth and government debt in the USA. Cambridge Journal of Economics, 36(1), 189-204.
  • Tekin, R. B. (2012). Economic growth, exports and foreign direct investment in Least Developed Countries: A panel Granger causality analysis. Economic Modelling, 29(3), 868-878.
  • Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66(1-2), 225-250.
  • Winner, L. (1993). The relationship of the current account balance and the budget balance. The American Economist, 37(2), 78-84.
  • Zengin, A. (2000). The twin deficits hypothesis (the Turkish case). Zonguldak Karaelmas University, Turkey, 217-228.
  • Zuze, M. (2016). Fiscal deficit-economic growth nexus in Zimbabwe: A vector auto regression analysis. International Journal of Innovative Research and Development, 5(6), 380-386.
  • Şahin, İ. E., & Mucuk, M. (2014). The effect of current account deficit on economic growth: The case of Turkey. Proceedings of International Academic Conferences, International Institute of Social and Economic Sciences

THE TWIN DEFICITS AND ECONOMIC GROWTH IN SELECTED AFRICAN COUNTRIES

Year 2021, Volume: 10 Issue: 2, 88 - 102, 30.06.2021

Abebe Aragaw

https://doi.org/10.17261/Pressacademia.2021.1407

Abstract

Purpose- The purpose of this paper is to examine the twin deficit hypothesis and its effect on economic growth for selected African countries using panel data ranging from 1988 to 2018.
Methodology- bootstrap panel Granger causality tests and dynamic panel threshold analysis are applied to find out the budget deficit and current account deficit causal relationships and their effect on economic growth.
Findings- Results of the bootstrap panel Granger causality tests confirmed mixed results. Out of 27 countries, results of 16 countries support the Ricardian equivalence hypothesis; this shows that there is no Granger causality running from budget deficit to current account deficit and vice versa. In addition, the results of the dynamic panel threshold model show that the budget deficit-GDP per capita relationship is not linear. Thus, a budget deficit of less than 0.152 percent has a significant positive effect on economic growth. Besides, regime-independent regressors such as current account deficits and government debt have a significant negative impact on GDP per capita. Investment spending, broad money, and political stability, on the other hand, have a significant positive effect.
Conclusion- To sum up, bootstrap panel Granger causality results support no Granger causality running from budget deficit to current account deficit and vice versa. In addition, the dynamic panel threshold analysis suggests that a budget deficit of less than 0.152% and a lower current account deficit growth-enhancing.

Keywords

Twin deficit hypothesis Granger causality budget deficit current account deficit economic growth threshold analysis

References

  • Adam, C. S., & Bevan, D. L. (2005). Fiscal deficits and growth in developing countries. Journal of Public Economics, 89(4), 571-597.
  • Aero, O., & Ogundipe, A. (2016). Fiscal deficit and economic growth in Nigeria: Ascertaining a feasible threshold. International Journal of Economics and Financial Issues, 8(3), 296.
  • Akosah, N. K. (2013). Threshold effect of budget deficits on economic growth in Ghana: An empirical analysis. Available at SSRN 2289523.
  • Aloryito, G. K., &Senadza, B. (2016). The twin deficits hypothesis: Evidence from Ghana. International Journal of Business and Economic Sciences Applied Research, 9(3), 55-62.
  • Anderson, T. W., & Hsiao, C. (1981). Estimation of dynamic models with error components. Journal of the American Statistical Association, 76(375), 598-606.
  • Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277.
  • Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
  • Baharumshah, A. Z., Lau, E., & Khalid, A. M. (2006). Testing twin deficits hypothesis using VARs and variance decomposition. Journal of the Asia Pacific Economy, 11(3), 331-354.
  • Ball, L., &Mankiw, N. G. (1995). What do budget deficits do? NBER working paper No. 5263
  • Baltagi, B. (2008). Econometric analysis of panel data.Chichester, UK:John wiley & Sons
  • Barro, R. (1988). The Ricardian approach to budget deficits. NBER working paper No. w2685
  • Boubtane, E., Coulibaly, D., & Rault, C. (2013). Immigration, unemployment and GDP in the host country: Bootstrap panel Granger causality analysis on OECD countries. Economic Modelling, 33, 261-269.
  • Breusch, T. S., & Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239.
  • Buchanan, J. M. (1976). Barro on the Ricardian equivalence theorem. Journal of Political Economy, 84(2), 337-342.
  • Cavallo, M. (2005). Understanding the twin deficits: New approaches, new results. FRBSF Economic Letter, Federal Reserve Bank of San Francisco issue jul22.
  • Cinar, M., Eroglu, I., &Demirel, B. (2014). Examining the role of budget deficit policies in economic growth from a Keynesian perspective. International Journal of Economics and Finance, 6(10), 191-200.
  • Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20(2), 249-272.
  • Dewald, W. G., & Ulan, M. (1990). The twin-deficit illusion. Cato Journal, 9(3), 689-707.
  • Dumitrescu, E., &Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29(4), 1450-1460.
  • Emirmahmutoglu, F., Bolat, S., & Belke, M. (2014). The Dynamic Linkages of Budget Deficits and Current Account Deficits Nexus in EU Countries: Bootstrap Panel Granger Causality Test. International Journal of Economic Perspectives, 8(2).
  • Emirmahmutoglu, F., & Kose, N. (2011). Testing for Granger causality in heterogeneous mixed panels. Economic Modelling, 28(3), 870-876.
  • Enders, W., & Lee, B. (1990). Current account and budget deficits: Twins or distant cousins? The Review of Economics and Statistics, 72(3), 373-381.
  • Erkin, B. (1988). Government Expenditure and Economic Growth: Reflections on Professor Ram’s Approach, A New Framework and Some Evidence from New Zealand Time Series Data. Keio Economic Studies, 25(1), 59-66.
  • Fatima, G., Ahmed, A. M., & Rehman, W. U. (2011). Fiscal deficit and economic growth: An analysis of Pakistan’s economy. International Journal of Trade, Economics and Finance, 501-504.
  • Friedman, B. (2005). Deficits and debt in the short and long run. NBER Working Papers 11630, National Bureau of Economic Research, Inc.
  • Gaibulloev, K., Sandler, T., & Sul, D. (2014). Dynamic panel analysis under cross-sectional dependence. Political Analysis, 22(2), 258-273.
  • Ganchev, G. T. (2010). The twin deficit hypothesis: the case of Bulgaria. Financial theory and Practice, 34(4), 357-377
  • Genevieve, G. (2020). The impact of fiscal deficit on economic growth: Using the Bounds test approach in the case of Morocco, MPRA paper 98925.
  • Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424.
  • Hsiao, C. (2006). Panel data analysis - Advantages and challenges. IEPR working papers 06.49, Institute of Economic Policy Research.
  • Im, K. S., Pesaran, M., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74.
  • Kar, M., Nazlıoğlu, Ş., & Ağır, H. (2011). Financial development and economic growth nexus in the MENA countries: Bootstrap panel Granger causality analysis. Economic Modelling, 28(1-2), 685-693.
  • Konya, L. (2006). Exports and growth: Granger causality analysis on OECD countries with a panel data approach. Economic Modelling, 23(6), 978-992.
  • Lau, E., & Tang, T. C. (2009). Twin deficits in Cambodia: Are there reasons for concern? An empirical study. Monash University, Department of Economics, Discussion Papers, 11(09), 1-9.
  • Levin, A., Lin, C., & James Chu, C. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.
  • Mankiw, N. G. (2010). Macroeconomics, 7th edition. Worth Publishers.
  • Mukhtar, T., Zakaria, M., & Ahmed, M. (2007). An empirical investigation for the twin deficits hypothesis in Pakistan. Journal of Economic Cooperation Among Islamic Countries, 28(4).
  • Ncanywa, T., & Letsoalo, T. E. (2019). Which among twin deficits hypothesis, twin divergence, and Ricardian's equivalence hold in a developing country? Journal of Public Affairs, 19(2), e1904.
  • Neaime, S. (2008). Twin deficits in Lebanon: A time series analysis. Lecture and working paper series No. 2, 2008.
  • Nelson, M. A., & Singh, R. D. (1994). The deficit-growth connection: Some recent evidence from developing countries. Economic Development and Cultural Change, 43(1), 167-191.
  • Nickell, S. (1981). Biases in dynamic models with fixed effects. Econometrica, 49(6), 1417-1426.
  • Njoroge, E. K. (2014). Testing the twin deficit hypothesis for Kenya 1970-2012.International Journal of Business and Economics Research, 3(5), 160.
  • Odim, O. U., Ngozi, O. C., & Lawrence, E. (2014). The Keynesian-Ricardian dichotomy on budget deficits in Nigeria. IOSR Journal of Economics and Finance, 5(2), 69-78.
  • Ogbonna, B. C. (2013). Twin deficits or Ricardian equivalence hypothesis: Evidence from Nigeria. Journal of Banking, 7(1), 1-48.
  • Osoro, K. O., Gor, S. O., &Mbithi, M. L. (2014). The twin deficit and the macroeconomic variables in Kenya. International Journal for Innovation Research, 2(9), 64-84.
  • Perera, A., & Liyanage, E. (2012). An empirical investigation of the twin deficit hypothesis: Evidence from Sri Lanka. Staff Studies, 41(1).
  • Pesaran, M. H. (2004). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 60(1), 13-50.
  • Pesaran, M. H., Ullah, A., & Yamagata, T. (2008). A bias-adjusted LM test of error cross-section independence. The Econometrics Journal, 11(1), 105-127.
  • Poi, B. P. (2004). From the help desk: Some bootstrapping techniques. The Stata Journal: Promoting communications on statistics and Stata, 4(3), 312-328.
  • Rangarajan, C., &Srivastava, D. K. (2005). Fiscal deficits and government debt in India: Implications for growth and stabilization. Economic and Political Weekly, 2919-2934
  • Rauf, A., & Khan, A. Q. (2011). An empirical study to find the relationship between trade deficit and budget deficit in Pakistan. Academic Research International, 1(3), 36.
  • Sakyi, D., & Opoku, E. O. (2016). The twin deficits hypothesis in developing countries: Empirical evidence for Ghana (Technical No. S-33201-GHA-1). International Growth Centre.
  • Slimani, S. (2016). Threshold effects of fiscal policy on economic activity in developing countries. International Journal of Business and Social Research, 6(3), 20.
  • Sobrino, C. R. (2013). The twin deficits hypothesis and reverse causality: A short-run analysis of Peru. Journal of Economics Finance and Administrative Science, 18(34), 9-15.
  • Swamy, P. A. (1970). Efficient inference in a random coefficient regression model. Econometrica, 38(2), 311.
  • Taylor, L., Proano, C. R., De Carvalho, L., & Barbosa, N. (2012). Fiscal deficits, economic growth and government debt in the USA. Cambridge Journal of Economics, 36(1), 189-204.
  • Tekin, R. B. (2012). Economic growth, exports and foreign direct investment in Least Developed Countries: A panel Granger causality analysis. Economic Modelling, 29(3), 868-878.
  • Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66(1-2), 225-250.
  • Winner, L. (1993). The relationship of the current account balance and the budget balance. The American Economist, 37(2), 78-84.
  • Zengin, A. (2000). The twin deficits hypothesis (the Turkish case). Zonguldak Karaelmas University, Turkey, 217-228.
  • Zuze, M. (2016). Fiscal deficit-economic growth nexus in Zimbabwe: A vector auto regression analysis. International Journal of Innovative Research and Development, 5(6), 380-386.
  • Şahin, İ. E., & Mucuk, M. (2014). The effect of current account deficit on economic growth: The case of Turkey. Proceedings of International Academic Conferences, International Institute of Social and Economic Sciences
There are 62 citations in total.

Details

Primary Language English
Subjects Finance, Business Administration
Journal Section Articles
Authors

Abebe Aragaw 0000-0001-8491-5635

Publication Date June 30, 2021
Published in Issue Year 2021 Volume: 10 Issue: 2

Cite

APA Aragaw, A. (2021). THE TWIN DEFICITS AND ECONOMIC GROWTH IN SELECTED AFRICAN COUNTRIES. Journal of Business Economics and Finance, 10(2), 88-102. https://doi.org/10.17261/Pressacademia.2021.1407

Journal of Business, Economics and Finance (JBEF) is a scientific, academic, double blind peer-reviewed, quarterly and open-access journal. The publication language is English. The journal publishes four issues a year. The issuing months are March, June, September and December. The journal aims to provide a research source for all practitioners, policy makers and researchers working in the areas of business, economics and finance. The Editor of JBEF invites all manuscripts that that cover theoretical and/or applied researches on topics related to the interest areas of the Journal. JBEF charges no submission or publication fee.



Ethics Policy - JBEF applies the standards of Committee on Publication Ethics (COPE). JBEF is committed to the academic community ensuring ethics and quality of manuscripts in publications. Plagiarism is strictly forbidden and the manuscripts found to be plagiarized will not be accepted or if published will be removed from the publication. Authors must certify that their manuscripts are their original work. Plagiarism, duplicate, data fabrication and redundant publications are forbidden. The manuscripts are subject to plagiarism check by iThenticate or similar. All manuscript submissions must provide a similarity report (up to 15% excluding quotes, bibliography, abstract, method).


Open Access - All research articles published in PressAcademia Journals are fully open access; immediately freely available to read, download and share. Articles are published under the terms of a Creative Commons license which permits use, distribution and reproduction in any medium, provided the original work is properly cited. Open access is a property of individual works, not necessarily journals or publishers. Community standards, rather than copyright law, will continue to provide the mechanism for enforcement of proper attribution and responsible use of the published work, as they do now.