Twin Deficit and the Macroeconomic variables in Kenya

Kennedy O. Osoro · Seth Omondi Gor · Mary Lucia Mbithi

10 citations0/0 files storedInternational Journal for Innovation Education and Research

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Fiscal Policies and Political Economy

Abstract

The purpose of this paper is to test the twin deficit hypothesis and empirical relationship between current account balance and budget deficit while including other important macroeconomic variables such as growth, interest rates, money supply (M3) in Kenya from 1963-2012. The study was based on co integration analysis and error correction model (ECM). The results reveal a long-run association between the trade deficit and the fiscal deficit. The findings indicate that the Keynesian view fits well for Kenya since the causality runs from budget deficit to current account deficit. We detected unidirectional causation between the twin deficits, running from budget deficit to current account directly and indirectly through budget deficits which raise real interest rates, crowd out domestic investment, and cause the currency to appreciate in relation to the other currencies and further deteriorates the current account deficit.

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References

1963Capital Mobility and Stabilization Policy Under Fixed and Flexible Exchange Rates 1962Domestic Financial Policies Under Fixed and Under Floating Exchange Rates 1962Domestic Financial Policies under Fixed and under Floating Exchange Rates (Politiques finacierieures interieures avec un systeme de taux de change fixe et avec un systeme de taux de change fluctuant) (Politica financiera interna bajo sistemas de tipos de cambio fijos o de tipos de cambio fluctuantes)1989The Ricardian Approach to Budget Deficits 2007Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S.1986New Evidence on Deficits and Interest Rates 1990Twin deficits during the 1980s: An empirical investigation 1990Current Account and Budget Deficits: Twins or Distant Cousins?

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