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Budget Deficits and Economic Growth: A Vector Error Correction Modelling of South Africa

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  • Kagiso Molefe
  • Andrew Maredza

Abstract

The primary motivation behind this study was to explore the consequential effects of budget deficit on South Africa`s economic growth. Six variables were used, namely: real GDP, budget deficit, real interest rate, labour, gross fixed capital formation and unemployment. The Vector Error Correction Model (VECM) was used to estimate the long-run equation and also measure the correction from disequilibrium of preceding periods. Using annual time series data spanning the period 1985 to 2015, empirical evidence from the study revealed that budget deficits and economic growth are inversely related. It was therefore concluded that high levels of budget deficit in South Africa have detrimental effects on the growth of the economy. The estimate of the speed of adjustment coefficient found in this study revealed that about 29 per cent of the variation in GDP from its equilibrium level is corrected within one year. The results obtained in this study are favourably similar to those in the literature and are also sustained by previous studies.

Suggested Citation

  • Kagiso Molefe & Andrew Maredza, 2017. "Budget Deficits and Economic Growth: A Vector Error Correction Modelling of South Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 9(2), pages 215-223.
    • Handle: RePEc:rnd:arjebs:v:9:y:2017:i:2:p:215-223
    DOI: 10.22610/jebs.v9i2(J).1662
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    References listed on IDEAS

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    1. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
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    3. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    4. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
    5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    6. Rumbidzai Aime Biza & Forget Mingiri Kapingura & Asrat Tsegaye, 2015. "Do budget deficits crowd out private investment? An analysis of the South African economy," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 8(1), pages 52-76.
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    Cited by:

    1. Raymond Osi Alenoghena & Samuel David Adebisi & Ayobola Olufolake Charles, 2022. "Fiscal Policy and Macroeconomic Variables in Africa: A Bayesian VAR Approach," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(12), pages 731-741, December.

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