Revisiting the twin deficits hypothesis: new evidence from nonlinear tests

ABSTRACT

This article investigates linear and nonlinear causal linkages between fiscal deficits and current account deficits in a sample of 12 African countries using quarterly data for the period 1980:1–2018:4. The results indicate evidence of unidirectional causality from current account deficits to the fiscal deficits in four countries while a unidirectional causality from fiscal deficit to current account deficit is found in five countries. Results from panel causality test revealed evidence of bidirectional causality between the two deficits. These conclusions suggest that policy to tackle one of the deficits should also take the other into consideration.

KEYWORDS:

• Fiscal deficits
• current account deficits
• nonlinear causality
• African countries

JEL CLASSIFICATION:

• H60
• H62
• C22
• C23

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A linear Granger causality test based on VAR has also s reported in Table 1.

² For some countries where the fiscal deficits variable is not available, we used the fiscal deficits reported by the Central Banks of the countries.

³ These countries accounted for about 75 per cent of the African countries GDP in 2009 (Ahmad, Pentecost and Harvey, 2011).

⁴ Further evidence on non-linearity of the series is evident in the summary statistics, which are not reported due to space limitation, but available in request.