Testing the twin deficit hypothesis for Kenya 1970-2012
Loading...
Date
2014
Authors
Njoroge, Erastus Kaiba
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Macro-economic theory suggests that there exists a causal relationship running
from Budget Deficit to Current account deficit a concept normally referred to as
the Twin Deficit Hypothesis (TDH). This claim has more often than not been the
subject of debate in the scholarly and policy front. Majority of existing literature
on the twin deficits hypothesis focuses on its relevance in already developed
economies. Further, existing literature has concentrated on analyzing the TDH on
a bivariate approach using annual data. This study sought to investigate the
relevance of the TDH nexus for Kenya using quarterly data in a multivariate
approach which included budget deficits, current account balance, interest rates
and exchange rates. The study analyzed quarterly data for a four decade period
spanning from 1970Ql - 2012Ql. To estimate if a relationship exists between the
variables, the proposal estimated the cointergration properties using Johansen &
Juselius model. The study also applied the VAR model to estimate IRF and
Variance decomposition. Finally, the study investigated the causal relationship of
the two deficits in the framework of Toda- Yamamoto's Granger causality test for
causality. From the analysis, the study concluded that the twin deficit hypothesis
does exist in Kenya when interest rates and exchange rates are included. In effect,
the study proposes that the government should formulate adequate fiscal and
monetary policies that will effectively manage the country expenditure and
revenue. The government should look into ways of increasing its revenues and
reducing expenditures.
Description
Department of Applied Economics, 75p. 2014