Testing the Validity of the Triple Deficit Hypothesis for Nigeria

Rahman Olanrewaju Raji

doi:10.33119/erfin.2019.4.2.2

Abstract

This paper tests the validity of the triple deficit hypothesis in Nigeria by examining the causal relationship among current account deficit, financial account deficit, and fiscal deficit within a five-variate ARDL framework complemented with GMM framework for the period 2008-2017 using quarterly data. The paper obviates the variable omission bias that characterizes most existing studies. The ARDL-bound testing technique confirms that there is the presence of a long-run bi-causal relationship between current account and financial account deficits in Nigeria. The results based on the model and empirical outputs suggest that authorities of this economy must put in place a fully fiscal and monetary discipline policy that should ensure the drastic curtailment of fiscal deficit and create a conducive environment to attract foreign remittances and foreign investment, which would help to generate healthy external balances. In addition, exchange rate stability can promote the export sector and minimize external imbalances through creating critical surpluses in current accounts, including related comprehensive discipline policies that may be pursued, which enable the external sector, financial and fiscal sectors, and monetary sector to perform without creating adverse imbalances in this economy.

Highlights

Keynesian absorption theory and the Mundell-Fleming model argued that a rise in fiscal deficits would increase domestic absorption and imports
There is an indication that current account deficit, financial account deficit, and fiscal deficit over the period have been characterized by a marked disparity, implying that these variables were high in some years, whereas they were abysmally lower than the observed average in other years
This paper studies the relationship between fiscal deficit, current account deficit, and financial account deficit and tests the extension of the twin deficit hypothesis called the “triple deficit hypothesis” in Nigeria using quarterly time-series data for the sample periods of 2008Q1 to 2017Q4 by means of Autoregressive Distributed Lag (ARDL) co-integration and Granger causality techniques

Summary

Introduction

Keynesian absorption theory and the Mundell-Fleming model argued that a rise in fiscal deficits would increase domestic absorption and imports. The saving gap was discovered to have an important effect on both the current account and budget deficits This is consistent with Tang (2014) who tested the triple deficit hypothesis on U.S data and confirmed that there is a positive relationship between fiscal policy, current account, and capital and financial balances, and that these are cointegrated indicating the presence of a bidirectional causality between current account and fiscal balance as well as the financial position of the United States. This study tends to incorporate other relevant variables, such as interest rate and gross domestic product

Literature Review

Theoretical Framework Research

Model Estimation

The Granger Causality Test Specification

Data Sources

Descriptive Statistics of Data Series

Stationarity Test

Results of the ARDL Bounds Test for Co-Integration

Results of the Granger Causality Test

Concluding Remarks