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

B.L. Naape¹

Section:Research Paper, Product Type: Journal-Paper
Vol.5 , Issue.11 , pp.18-24, Nov-2019

Online published on Nov 30, 2019

Copyright © B.L. Naape . This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
 

View this paper at   Google Scholar | DPI Digital Library

XML View     PDF Download

How to Cite this Paper

Abstract :
The idea of the overall budget balance to have a statistically significant impact on the current account balance is known as the Twin deficits hypothesis, which this study seeks to investigate. We made use of annual macroeconomic data spanning from 1970 – 2017. Additionally, we utilized novel time-series cointegration techniques such as the ARDL Bounds and Granger causality analysis. From empirical tests, we find that the overall budget deficit and current account deficit are cointegrated. Furthermore, the real interest rate, real effective exchange rate and GDP are found to have a negative and statistically significant effect on the current account balance while the overall budget deficit, on the contrary, is found to have a positive and statistically significant effect on the current account deficit, at least in the short term. Granger causality test indicates uni-directional 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 the fiscus to improve the budget stance and subsequently the current account stance. Improvements in tax administration efficiency and reductions in non-essential spending are a good starting point

Key-Words / Index Term :
ARDL Bounds test, Ricardian equivalence, Twin deficits, South Africa

References :
[1] Akbas, Y.E. and Lebe, F. (2016). Current account deficit, budget deficit and savings gap: is the twin or triplet deficit hypothesis valid in G7 countries? Prague Economic Papers, Vol.25, No.3
[2] Aqeel, A. and Nishat, M. (2000). The Twin Deficits Phenomenon: Evidence from Pakistan. The Pakistan Development Review, Vol.39, No.4, pp. 535–550
[3] Amaghionyeodiwe, L.A. and Akinyemi, O. (2015). Twin Deficit in Nigeria: A Re-Examination. Journal of Economic and Social Studies, Vol.5, No.2
[4] Ahmad, A.H. and Aworinde, O.B. (2015). Structural breaks and twin deficits hypothesis in African countries. Economic Change and Restructuring, Vol.48, No.1, pp.1-35.
[5] Barro, R.J. (1989). The Ricardian Approach to Budget Deficits. The Journal of Economic Perspectives, Vol.3, No.2, pp.37-54.
[6] Breusch, T. S. (1978). Testing for Autocorrelation in Dynamic Linear Models. Australian Economic Papers
[7] Epaphra, M. (2017). The Twin Deficits Hypothesis: An Empirical Analysis for Tanzania. The Romanian Economic Journal, Vol.65
[8] El-Baz, O. (2014). Empirical Investigation of the Twin Deficits Hypothesis: The Egyptian Case (1990-2012). Munich Personal RePEc Archive Paper No. 53428
[9] Egwaikhide, F.O., Oyeranti, O.A., Ayodele, O.S. & Tchokote, J. (2002). Causality between budget deficits and the current account balance in African Countries. West African Journal of Monetary and Economic Integration, Vol.2, No.2
[10] Elliot, G., Rothenberg, T.J. and Stock, J.H. (1996). Efficient test for an Autoregressive Unit Root. Econometrica, Vol.64, No.4. pp.813-836
[11] Fin24 Newsletter, February (2018). Winds of change blow even harder than expected. Available at: www.fin24.com/budget/winds-of-change-blow-even-harder-than-expected-20180221
[12] Fleming, M.J. (1962). ‘Domestic Financial Policies Under Fixed and Under Floating Exchange Rates’. International Monetary Fund Staff Papers, Vol.9, No.3, pp.369-380
[13] Fuller, W.A. (1976). Introduction to Statistical Time-Series. New York: John Wiley and Sons
[14] Granger, C.W.J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, Vol.37, pp.424-438
[15] Granger, C.W.J. (1980). Testing for causality: A personal viewpoint. Journal of Economic Dynamics and Control, Vol.2, pp.329-352
[16] Kalaj, E.K. and Mema, M. (2015). Investigating the Twin Deficits in Albania. European Journal of Social Sciences, Vol.2, No.2
[17] Kim, S. and Roubini, N. (2008). Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the U.S. Journal of International Economics, Vol.74, No.2, pp. 362-383.
[18] Mandishekwa, R., Tambudzai, C. and Marufu, A. (2014). Testing the Applicability of the Twin Deficits Hypothesis in Zimbabwe. Journal of Economics and Sustainable Development, Vol.5, No.28
[19] Mukhtar, T., Zakaria, M. and Ahmed, M. (2007). An empirical investigation for the twin deficit hypothesis in Pakistan. Journal of Economic Cooperation, Vol.28, No.4. pp.63-80
[20] Mundell, R.A. (1963). ‘Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates’. The Canadian Journal of Economics and Political Science, Vol.29, No.4, pp. 475-485.
[21] National Treasury (2018). Budget Review. Available at: http://www.treasury.gov.za./
[22] Pesaran, M.H., Shin, Y. and Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, Vol.16, No.3
[23] Sakyi, D. and Opoku, E.E.O. (2016). The Twin Deficits hypothesis in developing countries: Empirical evidence for Ghana. International Growth Centre, London School of Economic and Political Science, London
[24] South African Reserve Bank Quarterly bulletin (2017). Retrieved from: www.resbank.co.za
[25] Suresh, K.G. and Vikas, G. (2015). Relevance of Twin Deficit Hypothesis: An Econometric Analysis with Reference to India. Theoretical Economics Letters, 2015, 5, pp.304-311
[26] White, H. (1980). A Heteroscedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticity. Econometrica, Vol.48, No.4
[27] Hassan, M., Wajid, A., Mahmood, H. and Shahbaz, M. (2015). Testing relevance of twin deficit for a transition economy like Pakistan. Transylvanian Review of Administrative Sciences, No. 46, pp.91-106