Browsing by Author "Azene, Abebe"

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    The Current Account – Budget Deficits Link in Sub-Saharan Africa Countries: Panel VAR Modeling Approach
    (Addis Ababa University, 2008-06) Azene, Abebe; Brixiova, Zuzana (PhD)
    Many economists have argued that prolonged fiscal expansions contribute to current account imbalances. The purpose of this paper is to explore this phenomenon in the case of Sub-Saharan Africa countries during the period 1980 to 2007. In the framework of panel cointegration test, panel VAR Granger Causality analysis and a reduced-form consumption function, the paper evaluates the validity of the conventional (Keynesian) view and the Ricardian Equivalence Hypothesis in Sub-Saharan Africa economies. The major findings of this study are: First, as a priori expectation, a unidirectional causality that runs from current account deficits to budget deficits (termed as current account targeting by Summers (1988)) has been found for oil-importing Sub-Saharan Africa countries. In these countries exchange rate is found to be the main mediating variable in linking the two deficits. Second, for oil-exporting countries, while the findings from Granger causality test is in accordance with the Ricardian Equivalence Hypothesis, the restriction test from the estimation result of the reduced-form consumption function shows rejection of the pure Equivalence Hypothesis. One line of argument for the acceptance of the Keynesian Proposition for oil-exporting countries is that a rising consumption (both private and government) fueled by rising oil revenues eventually leads to current account deterioration. A policy implication resulting from these findings is that managing the current account deficit as well as the debt burden offers a scope for improvement in the budget deficits