Investigating locational asymmetry in the twin deficit hypothesis for the WAMZ countries

ABSTRACT

The study adopts the Quantile Autoregressive Distributed Lags (QARDL) method to examine the existence of locational asymmetry in the nexus between fiscal and current account deficits in the WAMZ zone. Results of the long run relationships using both variables as dependent variables, rejected the null hypotheses of parameter constancy across the quantiles, and established the variability of a twin deficit hypothesis across different quantiles. In the short run, the Keynesian view is validated for Gambia, Ghana, and Nigeria, whereas Serria Leone, Ghana, and Liberia indicated the Ricardian equivalence framework, suggesting the acceptance of twin divergence hypothesis. In addition, a causality analysis finds robust bi-directional causal evidence for the strong causal relationship along all specifications, validating the long run relationship established in the QARDL cointegration tests.

KEYWORDS:

• Twin-deficits hypothesis
• nonlinearity
• quantile ARDL

JEL CLASSIFICATION:

• C32
• F32
• E02
• H62

Acknowledgments

The authors gratefully acknowledge the insightful comments and suggestions of the peer-reviewers towards improving the quality of this manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Data is available upon request from the author(s).

Additional information

Notes on contributors

Taiwo Ajilore

Taiwo Ajilore is an Assistant Director in the Monetary Policy Department, Central Bank of Nigeria. He holds a PhD in Economics while his research interests are in the field of International Monetary Macroeconomics.

Nuruddeen Usman

Nuruddeen Usman is an Economist in the Monetary Policy Department, Central Bank of Nigeria. His research interest includes open economy macroeconomics, financial econometrics and time series forecasting.