Ways to face the twin deficit between public budget and the current account
with application to the Egyptian case
Keywords of the study submitted to get PHD’s degree in Economics by: Yousra Hassan
Omar Mohamed Nafie
Budget deficit, Current account deficit, Twin-deficit hypothesis, Ricardian equivalence, ARDL,
Current account sustainability, Nonlinear cointegration; Nonlinear autoregressive distributed lag
(NARDL) , Asymmetric relationship, Fiscal multiplier. Structural Vector Autoregressive Model.
Egypt
Abstract
The purpose of this thesis is to provide an assessment of the potential efficacy of
fiscal policy in Egypt as a countercyclical policy tool. This dissertation discusses
three related topics and consist of four chapters. The First chapter provides a survey
on empirical literature ,the Second chapter is an assessment of the Twin-Deficit
Hypothesis with empirical evidence from Egypt, the third chapter examine the
Sustainability of the Current Account Deficits with an evidence from a Nonlinear
Cointegration analysis. And the fourth Chapter is an empirical estimation of Fiscal
Multiplier in Egypt using SVAR analysis.
Chapter two provides an empirical analysis of the twin-deficit hypothesis in the
presence of structural breaks in Egypt. The chapter analyze the relationship between
the two deficits using the Autoregressive Distributed Lag (ARDL) approach and the
bootstrap causality test while considering the presence of breaks. Based on the
econometric results, no support for the twin deficit hypothesis was found in Egypt
over the long run. But a support for the Ricardian equivalence hypothesis was found.
The absence of any relationship between the two variables in the long run is backed
by the results of our bootstrap causality test. Still, the short-run analysis with the
ARDL model provides support for the existence of a relationship between the two
deficits in the short run. Overall, The findings suggest that, to restore external
balance, the government should rely more on policies to improve the
competitiveness of the economy, instead of considering fiscal policies.Chapter three
provides an investigation of the sustainability of the current account deficits using
a nonlinear cointegration approach, with an application to Egypt. We assess the
mean-reversion properties of the current account by examining the long-run
relationship between real exports and real imports, plus interest payments on
external debt. We use the nonlinear autoregressive distributed lag (NARDL) model
to assess their long-run relationship and compare the results with those of the linear
ARDL model. The results of the linear ARDL model suggest that there is no strong
evidence to support the sustainability of the Egyptian current account. However, the
results with the nonlinear model point toward the rejection of the null hypothesis of
no cointegration between the two variables. Moreover, we reject the null hypothesis
of no long-run asymmetry between the impacts of positive and negative shocks to
imports on exports. Overall, our results suggest that the Egyptian current account
followed a mean-reverting nonlinear process during the study period.In Chapter four
, we empirically estimate fiscal multiplier for Egypt. Using Structural Vector
Autoregressive Model (SVAR) model using quarterly data for the period 1990-2015.
The results show that the estimated fiscal multiplier was around positive at the first
year , then it turned to be negative in the second year. The chapter concluded that
very low fiscal multiplier is an indication of a weak impact of government spending
on real GDP during the period of the study. The study justified low fiscal multiplier
because of most of the rising expenditures are devoted to the continuous rise in
subsidies , debt services cost and public wage .The study recommend that the
government authorities should not rely solely on increasing the amount of spending
, but a series of complementary actions are needed to improve the efficiency of
public expenditure like , direct more spending toward productive. Also, cutting
government spending and increasing taxes will be more efficient case way to
increase economic growth in the Egyptian specifically in case of negative fiscal
multiplier |
