American Journal of Economics, Finance and Management
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American Journal of Economics, Finance and Management, Vol.1, No.4, Aug. 2015, Pub. Date: May 28, 2015
An Empirical Investigation of the Twin Deficits Hypothesis in Sub Saharan Africa (A Dynamic Panel Approach)
Pages: 236-241 Views: 4530 Downloads: 1963
[01] Ekpenyong Udom Imoh, Department of Economics and Development Studies, Federal University Oye-Ekiti, Ekiti State, Nigeria.
[02] Ogbuagu Matthew Ikechukwu, Department of Economics and Development Studies, Federal University Oye-Ekiti, Ekiti State, Nigeria.
Among the challenges confronting sub Saharan Africa (SSA) are maintaining favorable fiscal and trade balances. Based on historical data from these countries, both balances have simultaneously trended in the negative region. This suggests the presence of the twin deficits in SSA. To provide an empirical explanation for this relationship, we adopted a dynamic panel model. The model was estimated using the Generalised Method of Moments (GMM) estimation technique. This technique is suitable because it takes care of the serial correlation problem that may exist as a result of including the lagged value of the dependent variable as a regressor in the model. The result shows a positive and significant impact of the budget balance on the trade balance, confirming the presence of the twin deficits in SSA. Also, the long run impact of the budget balance on trade balance was discovered to be 0.6 or 60%.Based on the empirical findings, the study recommends that a necessary condition in reversing the negative trend in the trade balance in SSA is maintaining a favourable fiscal balance. That is, to reverse the downward trend in the trade balance in SSA, measures should be put in place first to reverse the fiscal deficits. Also, it was recommended that if SSA countries are to reap positive gains from trade agreements like the European Partnership Agreement (EPA), they should make efforts to add value to products they send to the international market.
Budget Deficits, Trade Deficits, Dynamic Panel, Generalised Method of Moments
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