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The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia

The study investigated the link between current account deficit and budget deficit as the primary objective, and the impact of other control variables on current account deficit was also examined. In order to achieve the object, the time series data running from 1987 to 2021, collected from various sources, is employed by using the autoregressive distributive lag (ARDL) model. Accordingly, both long run and short-run estimations are undertaken to find out the possible link between the current account deficit and the budget deficit. The empirical finding of this paper supports the existence of a positive relationship between the current account deficit and the budget deficit in the long run, whereas the paper rejects the Keynesian proposition and fails to find a significant positive relationship between the two variables in the short run. In order to grant statistical trustworthiness to the findings of the research, all diagnostic tests are conducted with appropriate testing mechanisms, and the model is found to be statistically healthy. As the fiscal deficit is found to be a significant factor in the current account, the study recommends a reduction of non-development expenditure and enhancement of domestic revenue collection. Besides, economic growth is found to have a negative and significant impact on the current account deficit in the long run; hence, the government should adopt an appropriate macroeconomic policy to enhance economic growth. The policy measure may target improving infrastructure, the quality of human capital, and the efficiency of the factors of production. Finally, money supply and the real effective exchange rate are also found to be a significant determinant of the current account deficit, in the long run, suggesting the requirement of appropriate monetary policy by the central bank to have an optimum money supply and a stable exchange rate.

Twin Deficit, ARDL, Keynesian Proposition, Ricardian Equivalence

APA Style

Abera Fekadu Hailemareiam. (2023). The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. American Journal of Theoretical and Applied Business, 9(2), 57-69. https://doi.org/10.11648/j.ajtab.20230902.15

ACS Style

Abera Fekadu Hailemareiam. The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. Am. J. Theor. Appl. Bus. 2023, 9(2), 57-69. doi: 10.11648/j.ajtab.20230902.15

AMA Style

Abera Fekadu Hailemareiam. The Twin Deficits Hypothesis: An Empirical Analysis for Ethiopia. Am J Theor Appl Bus. 2023;9(2):57-69. doi: 10.11648/j.ajtab.20230902.15

Copyright © 2023 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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