This thesis examines the effects of budget deficits on the current account imbalance and inflation in African countries. The aims of this thesis are; first, to use higher frequency data. Most studies in African countries use annual data; by contrast we use quarterly data. Second, to examine the dynamic interaction between fiscal deficits and current account imbalances using VAR models. Third, to explore the long-run relationship between the twin deficits, using the autoregressive distributed lag (ARDL) of Pesaran, Shin and Smith (2001). Fourth, to assess the long-run relationship between the twin deficits using the threshold autoregressive models of Hansen and Seo (2002). Fifth, to model inflation as being non-linearly related to fiscal deficits using the asymmetric cointegration approach of Enders and Siklos (2001). The second chapter discusses the theoretical framework and review of the empirical literature on twin deficits and fiscal deficits and inflation. We find much evidence in support of the twin deficits hypothesis that increase in government deficits leads to increase in the current account deficits. There is little empirical study on the Ricardian equivalence hypothesis. From the twin deficits literature, we observe that where the twin deficits hypothesis holds there is a high degree of openness and also countries operates a flexible exchange rate. The empirical literature on fiscal deficits and inflation suggests that fiscal deficits are inflationary in high inflation economies and developing countries, but not in low inflation and developed countries. The third chapter examines the time series properties of the series using the Augmented Dickey-Fuller test, the Phillip-Perron test and the Lee and Strazicich (2003) two-break unit root test. Results for the unit root test reveals that majority of the series are significant in their first differences. By contrast applying the LM two structural break test shows that the majority of the series are significant around two structural breaks. The fourth chapter analyses the twin deficits hypothesis using a VAR model. Results show that a positive government deficit shock increases the current account deficit in Botswana, Egypt, Ethiopia, Ghana, Morocco, South Africa and Tanzania while the current account improves in response to a positive government deficit shock in Cameroon and Uganda. Also in response to a positive government deficit shock, the current account remains constant in Kenya, Nigeria and Tunisia. The fifth chapter examine the long run relationship between the twin deficits hypothesis accounting for structural breaks using the Autoregressive Distributed Lags (ARDL) model. Results show that the fiscal deficit in the twelve African countries has long run impact on the current account deficit. The sixth chapter examines the relationship between fiscal deficit and current account deficit using the bi-variate threshold cointegration model of Hansen and Seo (2002) for nine countries where the fiscal deficits and current account deficits were significant at first differences. We find evidence of a positive cointegrating relationship between the current account and the fiscal balances for Botswana, Cameroon, Egypt, Morocco, Nigeria and Tanzania; and a negative cointegrating relationship in Ethiopia, Kenya and Uganda. The seventh chapter examines the long-run relationship between fiscal deficits and inflation in eleven African countries using the TAR and M-TAR models of Enders and Siklos (2001). Results show that fiscal deficits and inflation are asymmetry in Botswana, Egypt, Ethiopia, Ghana, Kenya, Morocco and Tanzania. This thesis centres on the twin deficits and fiscal deficits and inflation in African countries. Conclusions from the empirical chapters indicate that large fiscal deficits is the cause of current account deficits, and that fiscal deficits are inflationary. This study further suggests that African countries should spend their resources on projects that will accelerate the level of growth and development.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:629656 |
| Date | January 2013 |
| Creators | Aworinde, Olalekan B. |
| Contributors | Martin, Christopher |
| Publisher | University of Bath |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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