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An empirical investigation of budget and trade deficits: the case of Nigeria

Author

Listed:
  • Olugbenga A. Onafowora
  • Oluwole OwoyeAuthor-Workplace-Name: Susquehana University, USA

    (Western Connecticut State University, USA)

Abstract

This paper uses cointegration and vector error-correction techniques, Granger-causality tests and, generalized impulse response analysis to examine the ìtwin deficitsî phenomenon in Nigeria - a small open but oil dependent economy in Africa. We find evidence of positive relationship between trade and budget deficits in both the short- and long-run. This finding supports the conventional Keynesian twin deficits proposition and refutes the Ricardian Equivalence Hypothesis. Contrary to the conventional proposition that budget deficits cause trade deficits, our results indicate unidirectional causality from trade deficits to budget deficits for Nigeria. An implicit policy implication of our findings is that attempts to reduce budget deficits in Nigeria must begin with reductions in trade deficits which could be achieved through indirect monetary channels.

Suggested Citation

  • Olugbenga A. Onafowora & Oluwole OwoyeAuthor-Workplace-Name: Susquehana University, USA, 2006. "An empirical investigation of budget and trade deficits: the case of Nigeria," Journal of Developing Areas, Tennessee State University, College of Business, vol. 39(2), pages 153-174, January-M.
    • Handle: RePEc:jda:journl:vol.39:year:2006:issue2:pp:153-174
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    Citations

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    Cited by:

    1. Hany Eldemerdash & Hugh Metcalf & Sara Maioli, 2014. "Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective," Empirical Economics, Springer, vol. 47(3), pages 825-851, November.
    2. Asrafuzzaman & Amit Roy & Sanat Das Gupta, 2013. "An Empirical Investigation of Budget and Trade Deficits: The Case of Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 570-579.
    3. Linda Akoto & Daniel Sakyi, 2019. "Empirical Analysis of the Determinants of Trade Balance in Post-liberalization Ghana," Foreign Trade Review, , vol. 54(3), pages 177-205, August.
    4. Dushni Weerakoon & Utsav Kumar & Roselle Dime, 2019. "Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits," Working Papers id:13022, eSocialSciences.
    5. Ranjan Kumar Mohanty, 2019. "An Empirical Investigation of Twin Deficits Hypothesis: Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(3), pages 579-601, September.
    6. Olawumi Dele Awolusi & Ezekiel Jide Fayomi & GANIYU Idris Olayiwola, 2017. "International Trade, Foreign Direct Investment (FDI) and International Technology Transfer: A Comparative Study of Asian and African Economies," Journal of Economics and Behavioral Studies, AMH International, vol. 8(6), pages 127-145.
    7. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    8. Ergin Akalpler & Yohanna Panshak, 2019. "Dynamic relationship between budget deficit and current account deficit in the light of Nigerian empirical application," Evolutionary and Institutional Economics Review, Springer, vol. 16(1), pages 159-179, June.
    9. Tosun, M. Umur & Iyidogan, Pelin Varol & Telatar, Erdinç, 2014. "The Twin Deficits in Selected Central and Eastern European Economies: Bounds Testing Approach with Causality Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 141-160, June.
    10. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.
    11. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-11.
    12. Mumtaz, Kinza & Munir, Kashif, 2016. "Dynamics of Twin Deficits in South Asian Countries," MPRA Paper 74592, University Library of Munich, Germany.
    13. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 1-16.
    14. Nurudeen Abu & Awadh Ahmed Mohammed Gamal, 2020. "An Empirical Investigation of the Twin Deficits Hypothesis in Nigeria: Evidence from Cointegration Techniques," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.
    15. Murshed, Muntasir & Nijhum, Nawrin Khan, 2019. "The Fiscal and Current Account Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh," MPRA Paper 97115, University Library of Munich, Germany.
    16. Piotr Bartkiewicz, 2020. "Quantitative Easing: New Normal or Emergency Measure?," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.

    More about this item

    Keywords

    Twin Deficits; Ricardian Equivalence Hypothesis; Cointegration; ErrorCorrection Model; Granger-causality; Innovation Accounting; Nigeria;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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