Abstract:

Purpose- The purpose of this paper is to examine the twin deficit hypothesis and its effect on economic growth for selected African countries using panel data ranging from 1988 to 2018. Methodology- bootstrap panel Granger causality tests and dynamic panel threshold analysis are applied to find out the budget deficit and current account deficit causal relationships and their effect on economic growth. Findings- Results of the bootstrap panel Granger causality tests confirmed mixed results. Out of 27 countries, results of 16 countries support the Ricardian equivalence hypothesis; this shows that there is no Granger causality running from budget deficit to current account deficit and vice versa. In addition, the results of the dynamic panel threshold model show that the budget deficit-GDP per capita relationship is not linear. Thus, a budget deficit of less than 0.152 percent has a significant positive effect on economic growth. Besides, regime-independent regressors such as current account deficits and government debt have a significant negative impact on GDP per capita. Investment spending, broad money, and political stability, on the other hand, have a significant positive effect. Conclusion- To sum up, bootstrap panel Granger causality results support no Granger causality running from budget deficit to current account deficit and vice versa. In addition, the dynamic panel threshold analysis suggests that a budget deficit of less than 0.152% and a lower current account deficit growth-enhancing.

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