The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia

Abera Fekadu Hailemareiam

doi:doi:10.11648/j.ajtab.20230902.15

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The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia

Abera Fekadu Hailemareiam

Published in American Journal of Theoretical and Applied Business (Volume 9, Issue 2)

Received: 20 October 2022 Accepted: 10 November 2022 Published: 27 June 2023

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Abstract

The study investigated the link between current account deficit and budget deficit as the primary objective, and the impact of other control variables on current account deficit was also examined. In order to achieve the object, the time series data running from 1987 to 2021, collected from various sources, is employed by using the autoregressive distributive lag (ARDL) model. Accordingly, both long run and short-run estimations are undertaken to find out the possible link between the current account deficit and the budget deficit. The empirical finding of this paper supports the existence of a positive relationship between the current account deficit and the budget deficit in the long run, whereas the paper rejects the Keynesian proposition and fails to find a significant positive relationship between the two variables in the short run. In order to grant statistical trustworthiness to the findings of the research, all diagnostic tests are conducted with appropriate testing mechanisms, and the model is found to be statistically healthy. As the fiscal deficit is found to be a significant factor in the current account, the study recommends a reduction of non-development expenditure and enhancement of domestic revenue collection. Besides, economic growth is found to have a negative and significant impact on the current account deficit in the long run; hence, the government should adopt an appropriate macroeconomic policy to enhance economic growth. The policy measure may target improving infrastructure, the quality of human capital, and the efficiency of the factors of production. Finally, money supply and the real effective exchange rate are also found to be a significant determinant of the current account deficit, in the long run, suggesting the requirement of appropriate monetary policy by the central bank to have an optimum money supply and a stable exchange rate.

Published in	American Journal of Theoretical and Applied Business (Volume 9, Issue 2)
DOI	10.11648/j.ajtab.20230902.15
Page(s)	57-69
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Twin Deficit, ARDL, Keynesian Proposition, Ricardian Equivalence

References

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Abera Fekadu Hailemareiam. (2023). The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. American Journal of Theoretical and Applied Business, 9(2), 57-69. https://doi.org/10.11648/j.ajtab.20230902.15

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Abera Fekadu Hailemareiam. The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. Am. J. Theor. Appl. Bus. 2023, 9(2), 57-69. doi: 10.11648/j.ajtab.20230902.15

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AMA Style

Abera Fekadu Hailemareiam. The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. Am J Theor Appl Bus. 2023;9(2):57-69. doi: 10.11648/j.ajtab.20230902.15

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@article{10.11648/j.ajtab.20230902.15,
  author = {Abera Fekadu Hailemareiam},
  title = {The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia},
  journal = {American Journal of Theoretical and Applied Business},
  volume = {9},
  number = {2},
  pages = {57-69},
  doi = {10.11648/j.ajtab.20230902.15},
  url = {https://doi.org/10.11648/j.ajtab.20230902.15},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajtab.20230902.15},
  abstract = {The study investigated the link between current account deficit and budget deficit as the primary objective, and the impact of other control variables on current account deficit was also examined. In order to achieve the object, the time series data running from 1987 to 2021, collected from various sources, is employed by using the autoregressive distributive lag (ARDL) model. Accordingly, both long run and short-run estimations are undertaken to find out the possible link between the current account deficit and the budget deficit. The empirical finding of this paper supports the existence of a positive relationship between the current account deficit and the budget deficit in the long run, whereas the paper rejects the Keynesian proposition and fails to find a significant positive relationship between the two variables in the short run. In order to grant statistical trustworthiness to the findings of the research, all diagnostic tests are conducted with appropriate testing mechanisms, and the model is found to be statistically healthy. As the fiscal deficit is found to be a significant factor in the current account, the study recommends a reduction of non-development expenditure and enhancement of domestic revenue collection. Besides, economic growth is found to have a negative and significant impact on the current account deficit in the long run; hence, the government should adopt an appropriate macroeconomic policy to enhance economic growth. The policy measure may target improving infrastructure, the quality of human capital, and the efficiency of the factors of production. Finally, money supply and the real effective exchange rate are also found to be a significant determinant of the current account deficit, in the long run, suggesting the requirement of appropriate monetary policy by the central bank to have an optimum money supply and a stable exchange rate.},
 year = {2023}
}

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TY  - JOUR
T1  - The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia
AU  - Abera Fekadu Hailemareiam
Y1  - 2023/06/27
PY  - 2023
N1  - https://doi.org/10.11648/j.ajtab.20230902.15
DO  - 10.11648/j.ajtab.20230902.15
T2  - American Journal of Theoretical and Applied Business
JF  - American Journal of Theoretical and Applied Business
JO  - American Journal of Theoretical and Applied Business
SP  - 57
EP  - 69
PB  - Science Publishing Group
SN  - 2469-7842
UR  - https://doi.org/10.11648/j.ajtab.20230902.15
AB  - The study investigated the link between current account deficit and budget deficit as the primary objective, and the impact of other control variables on current account deficit was also examined. In order to achieve the object, the time series data running from 1987 to 2021, collected from various sources, is employed by using the autoregressive distributive lag (ARDL) model. Accordingly, both long run and short-run estimations are undertaken to find out the possible link between the current account deficit and the budget deficit. The empirical finding of this paper supports the existence of a positive relationship between the current account deficit and the budget deficit in the long run, whereas the paper rejects the Keynesian proposition and fails to find a significant positive relationship between the two variables in the short run. In order to grant statistical trustworthiness to the findings of the research, all diagnostic tests are conducted with appropriate testing mechanisms, and the model is found to be statistically healthy. As the fiscal deficit is found to be a significant factor in the current account, the study recommends a reduction of non-development expenditure and enhancement of domestic revenue collection. Besides, economic growth is found to have a negative and significant impact on the current account deficit in the long run; hence, the government should adopt an appropriate macroeconomic policy to enhance economic growth. The policy measure may target improving infrastructure, the quality of human capital, and the efficiency of the factors of production. Finally, money supply and the real effective exchange rate are also found to be a significant determinant of the current account deficit, in the long run, suggesting the requirement of appropriate monetary policy by the central bank to have an optimum money supply and a stable exchange rate.
VL  - 9
IS  - 2
ER  -

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Abera Fekadu Hailemareiam

School of International Trade and Economics, University of International Business and Economics, Beijing, China

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Abera Fekadu Hailemareiam. (2023). The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. American Journal of Theoretical and Applied Business, 9(2), 57-69. https://doi.org/10.11648/j.ajtab.20230902.15

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Abera Fekadu Hailemareiam. The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. Am. J. Theor. Appl. Bus. 2023, 9(2), 57-69. doi: 10.11648/j.ajtab.20230902.15

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AMA Style

Abera Fekadu Hailemareiam. The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. Am J Theor Appl Bus. 2023;9(2):57-69. doi: 10.11648/j.ajtab.20230902.15

Copy | Download

@article{10.11648/j.ajtab.20230902.15,
  author = {Abera Fekadu Hailemareiam},
  title = {The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia},
  journal = {American Journal of Theoretical and Applied Business},
  volume = {9},
  number = {2},
  pages = {57-69},
  doi = {10.11648/j.ajtab.20230902.15},
  url = {https://doi.org/10.11648/j.ajtab.20230902.15},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajtab.20230902.15},
  abstract = {The study investigated the link between current account deficit and budget deficit as the primary objective, and the impact of other control variables on current account deficit was also examined. In order to achieve the object, the time series data running from 1987 to 2021, collected from various sources, is employed by using the autoregressive distributive lag (ARDL) model. Accordingly, both long run and short-run estimations are undertaken to find out the possible link between the current account deficit and the budget deficit. The empirical finding of this paper supports the existence of a positive relationship between the current account deficit and the budget deficit in the long run, whereas the paper rejects the Keynesian proposition and fails to find a significant positive relationship between the two variables in the short run. In order to grant statistical trustworthiness to the findings of the research, all diagnostic tests are conducted with appropriate testing mechanisms, and the model is found to be statistically healthy. As the fiscal deficit is found to be a significant factor in the current account, the study recommends a reduction of non-development expenditure and enhancement of domestic revenue collection. Besides, economic growth is found to have a negative and significant impact on the current account deficit in the long run; hence, the government should adopt an appropriate macroeconomic policy to enhance economic growth. The policy measure may target improving infrastructure, the quality of human capital, and the efficiency of the factors of production. Finally, money supply and the real effective exchange rate are also found to be a significant determinant of the current account deficit, in the long run, suggesting the requirement of appropriate monetary policy by the central bank to have an optimum money supply and a stable exchange rate.},
 year = {2023}
}

Copy | Download

TY  - JOUR
T1  - The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia
AU  - Abera Fekadu Hailemareiam
Y1  - 2023/06/27
PY  - 2023
N1  - https://doi.org/10.11648/j.ajtab.20230902.15
DO  - 10.11648/j.ajtab.20230902.15
T2  - American Journal of Theoretical and Applied Business
JF  - American Journal of Theoretical and Applied Business
JO  - American Journal of Theoretical and Applied Business
SP  - 57
EP  - 69
PB  - Science Publishing Group
SN  - 2469-7842
UR  - https://doi.org/10.11648/j.ajtab.20230902.15
AB  - The study investigated the link between current account deficit and budget deficit as the primary objective, and the impact of other control variables on current account deficit was also examined. In order to achieve the object, the time series data running from 1987 to 2021, collected from various sources, is employed by using the autoregressive distributive lag (ARDL) model. Accordingly, both long run and short-run estimations are undertaken to find out the possible link between the current account deficit and the budget deficit. The empirical finding of this paper supports the existence of a positive relationship between the current account deficit and the budget deficit in the long run, whereas the paper rejects the Keynesian proposition and fails to find a significant positive relationship between the two variables in the short run. In order to grant statistical trustworthiness to the findings of the research, all diagnostic tests are conducted with appropriate testing mechanisms, and the model is found to be statistically healthy. As the fiscal deficit is found to be a significant factor in the current account, the study recommends a reduction of non-development expenditure and enhancement of domestic revenue collection. Besides, economic growth is found to have a negative and significant impact on the current account deficit in the long run; hence, the government should adopt an appropriate macroeconomic policy to enhance economic growth. The policy measure may target improving infrastructure, the quality of human capital, and the efficiency of the factors of production. Finally, money supply and the real effective exchange rate are also found to be a significant determinant of the current account deficit, in the long run, suggesting the requirement of appropriate monetary policy by the central bank to have an optimum money supply and a stable exchange rate.
VL  - 9
IS  - 2
ER  -

Copy | Download