Is the Co-Movement Between Budget Deficit and Current Account Deficit Applicable to South Africa?

Naape, Baneng (2019): Is the Co-Movement Between Budget Deficit and Current Account Deficit Applicable to South Africa? Published in: International Journal of Scientific Research in Multidisciplinary Studies , Vol. 5, No. 11 (30 November 2019): pp. 18-24.

Abstract

The idea of the fiscal balance to have a statistically significant impact on the current account is known as the Twin deficits hypothesis, which this study seeks to investigate. We make use of annual macroeconomic data spanning from 1990 – 2017. Additionally, we utilise novel time-series cointegration techniques such as the ARDL Bounds and Granger causality analysis. From empirical tests, we find that a long-run relationship exists between budget deficit and current account deficit. Moreover, the real effective exchange rate, real interest rate and GDP are found to have a negative and statistically significant impact on the current account whereas the budget deficit, on the contrary, is found to have a positive and statistically significant impact on the current account deficit, at least in the short-run. Granger causality test indicates unidirectional causation from budget deficit to current account deficit, lagged one period. Given these findings, we fail to reject the Twin Deficits Hypothesis within the context of South Africa. The policy implication is for the government to fix its fiscus so as to improve the current account stance. This can be achieved through extended fiscal adjustments to bring expenditure in line with revenue, thereby stabilising debt.

• Item Type: MPRA Paper
• Language: English
• Keywords: Twin deficits, Ricardian equivalence, ARDL Bounds test, Granger causality
• Subjects: A - General Economics and Teaching > A1 - General Economics; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; H - Public Economics > H6 - National Budget, Deficit, and Debt

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