Twin Deficit Hypothesis and Macroeconomic Fundamentals: New Evidence from Nigeria

Abstract

This study tests for the validity of the twin-deficit hypothesis in Nigeria for the period 1981 – 2018 and further seeks to ascertain the role of macroeconomic fundamentals in driving this hypothesis using the non-linear autoregressive distributed lag (NARDL) model and structural vector autoregressive (SVAR) model. With evidence from granger causality test, the results obtained for the NARDL model support the validation of the twin-deficit hypothesis for the Nigerian economy. As long-run equilibrium exists, it was further established that the twin deficits were majorly driven by the degrees of financial and trade openness in Nigeria as no substantial shock effects of the twin deficits were traceable to any of the macroeconomic fundamentals. It is therefore recommended that policy makers in Nigeria should properly sequence the degree of economic openness to ensure the overall health of the economy.

Justification of the twin deficit hypothesis in Bangladesh

“…When there is International Trade, Politics and Development disequilibrium in the system, the ECT coefficient suggests that it can be adjusted back to long-run equilibrium at an average pace of 1.868. Therefore, the result of Table 5 confirms the validity of twin deficit hypothesis which is in line with Ayinde et al (2021) and Dey and Tareque (2021).…”

“…Validation of the twin-deficit hypothesis for the Nigerian economy is supported by the results of the NARDL model obtained by Ayinde et al (2021), which were obtained using a granger causality test. Due to the existence of long-run equilibrium, it was determined that the twin deficits were primarily driven by the degrees of financial and trade openness in Nigeria, with no evidence of any significant shock effects of the twin deficits being able to be traced to any of the macroeconomic fundamentals.…”