TWIN DEFICIT OR REVERSE CAUSALITY? AN EMPIRICAL VERIFICATION FOR NIGERIA

Abstract

In light of the persistent and coinciding internal and external imbalances across economies, there remains an argument that worsening trade deficit is the result of higher fiscal imbalance. However, no concrete consensus either theoretically or empirically exists, particularly, in the context of Nigeria. Therefore, the twin deficit hypothesis (TDH) phenomenon becomes more of an empirical question. Also, in the light of recent budgetary expansions and the growing deficits as well as the recent economic downturns, this paper revisits the TDH in Nigeria. To this end, the study used the Toda-Yamamoto (T-Y) procedure to test the validity of the TDH in the country spanning 1986 to 2021. Empirical findings revealed that fiscal deficits cause current account deficit in Nigeria, reinforcing the validity of TDH. Consequently, the study suggests enacting budget cuts to sustainable levels, together with a strong focus on export promotion, driven by gains in domestic production, to solve the issue that may arise as a result of this causal relationship.