Investigating Twin Deficit Hypothesis in Nigeria

Investigating Twin Deficit Hypothesis in Nigeria.

ABSTRACT

The objective of this work is to investigate the twin deficit hypothesis in Nigeria from 1981-2015. The study made use of secondary data sourced from the Central Bank of Nigeria statistical bulletin.

The variable used for the study is Current Account Deficit (CAD) being the dependent variables are Budget Deficit(BD), Real Gross Domestic Product(RGDP).

Manufacturing Output Product(MOP) and Real exchange rate (RER) Using Ordinary Least Square Method (OLS) multiple regression techniques, the study revealed that there is no causal relationship between current account deficit and budget deficit  in Nigeria.

The study also reveals that there is a positive relationship between budget deficit and current account deficit in Nigeria such that an increase in the budget deficit will trigger a worsening of current account position thereby reaffirming the twin deficit phenomenon in Nigeria.

Persistent budget deficit may lead to chronic current account disequilibrium which may further hinder economic growth. Government must in that pursue fiscal policy that aligns expenditure with revenue.

INTRODUCTION

The “Twin deficit” debate was a common policy issue during the 1980s and the early 1990s and the term was initially invented to describe the co-movement between the budget deficit and the current account deficit (Chang and Hsu, 2009).

A twin deficit otherwise known as “double deficit” occurs when a nation has both a current account deficit and a fiscal deficit (Tonia, 2007).  Twin deficits hypothesis asserts that an increase in budget deficit will cause a similar increase in current account deficit.

That is, there exist a co-movement between fiscal deficits and the current account deficits. (Ogbonna, 2014).A fiscal deficit otherwise known as budget deficit occurs when government spending exceeds government revenues. It represents a significant portion of federal spending that must be financed through the issuance of debt (Neaime, 2008).

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