The Effect of Government Budget on Current Account: Evidence from Ethiopia
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Date
1999-06
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A.A.U
Abstract
This paper attempts to examine the effect of one of the major internal
imbalances-budget deficit- on the similarly imbalance-the curr.ent.
account deficit, both theoretically and empirically. Theoretically. It is found difficult
to establish a direct relationship between the budget deficit and the current account.
But a number of indirect channels through which the effect of the budget deficit on the
current account is mediated have been identified. The indirect nature of the channels
has bared us from hypothesizing the extent of the effect and the time period that it
could take.
Empirically, the granger causality tests revealed that not only does the budget
deficit cause the current account deficit but also the current account deficit is found to
cause budget deficit. While it is interesting to find that current account deficits can
cause budget deficits as well, finding a valuable theoretical support for this
causation has remained elusive. The two stage least square regression and lime series
modeling exercise results showed that budget deficit does have u strong and
significant effect on the current account deficit both in the short and long run.
Approximately, more than half of the change in the budget deficit is found to spill over
to the same direction change in the current account deficit. This findings of the study,
thus, strongly supports the notion that fiscal adjustment should be taken as a
prerequisite for current account imbalance adjustment
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Keywords
Budget, Current Account, Ethiopia, Evidence