TITLE:
Testing the Twin Deficits Hypothesis: Effect of Fiscal Balance on Current Account Balance—A Panel Analysis of Sub-Saharan Africa
AUTHORS:
Godson Korbla Aloryito, Bernardin Senadza, Edward Nketiah-Amponsah
KEYWORDS:
Twin Deficits, Fiscal Deficit, Current Account Deficit, System GMM, Sub-Saharan Africa
JOURNAL NAME:
Modern Economy,
Vol.7 No.9,
August
12,
2016
ABSTRACT: The twin deficits hypothesis
holds if government’s fiscal deficit, through its impact on national saving and
consumption, leads to a deterioration of the current account. The fiscal and
current account deficits of most countries in Sub-Saharan Africa (SSA) appear
relatively large or have been widening over the past several years in the face
of positive output growth and steady decline in inflation. Using data for 41
countries from 2000 to 2012, we test the twin deficits hypothesis for SSA.
Applying the system Generalised Method of Moments (GMM) estimation technique,
the major conclusion drawn from the results indicates that fiscal deficits tend
to improve the current account and vice versa, thereby rejecting the twin deficits
hypothesis in favor of the twin divergence proposition. The findings,
nonetheless, have policy relevance for the region.