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Quarterly Journal of Econometrics Research

June 2021, Volume 7, 1, pp 1-12

Twin Deficit Hypothesis and Macroeconomic Fundamentals: New Evidence from Nigeria

Taofeek Olusola AYINDE

,

Muritala Olayemi OGUNSIJI

,

Kaosarat Olawunmi IBIKUNLE

Taofeek Olusola AYINDE 1 ,

Muritala Olayemi OGUNSIJI 1 Kaosarat Olawunmi IBIKUNLE 3

  1. Lecturer and Researcher, Department of Economics, Fountain University, Oke-Osun, Osogbo, Osun State, Nigeria. 1

  2. Research Assistant, Department of Economics, Fountain University, Oke-Osun, Osogbo, Osun State, Nigeria. 3

Pages: 1-12

DOI: 10.18488/journal.88.2021.71.1.12

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Article History:

Received: 04 June, 2021
Revised: 07 July, 2021
Accepted: 09 August, 2021
Published: 02 September, 2021


Abstract:

This study tests for the validity of the twin-deficit hypothesis in Nigeria for the period 1981 – 2018 and further seeks to ascertain the role of macroeconomic fundamentals in driving this hypothesis using the non-linear autoregressive distributed lag (NARDL) model and structural vector autoregressive (SVAR) model. With evidence from granger causality test, the results obtained for the NARDL model support the validation of the twin-deficit hypothesis for the Nigerian economy. As long-run equilibrium exists, it was further established that the twin deficits were majorly driven by the degrees of financial and trade openness in Nigeria as no substantial shock effects of the twin deficits were traceable to any of the macroeconomic fundamentals. It is therefore recommended that policy makers in Nigeria should properly sequence the degree of economic openness to ensure the overall health of the economy.
Contribution/ Originality
The study employs the novel technique of non-linear autoregressive distributed lag (NARDL) to investigate the asymmetric relationship between fiscal and current account deficits. More so, the study distinguishes between budget deficit and fiscal deficit in estimations through the inclusion of borrowing, as a significant component of fiscal deficit in Nigeria.

Keywords:

Current account deficits, Fiscal deficits, Exchange rate, Interest rate, Economy openness, Autoregressive model, Structural model.

Reference:


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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

All authors contributed equally to the conception and design of the study.

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