Twin Deficit Hypothesis and Economic Growth in Nigeria

As economic turmoil extends across countries, discussions on fiscal policy have taken center stage. In particular, mounting fiscal and external deficits in many economies have revived interest in the Twin Deficit Hypothesis. This timely study empirically examines this hypothesis and economic growth in Nigeria from 1986-2022 using Toda-Yamamoto and ARDL models. Analysis uncovered a two-way relationship between budget shortfalls and trade gaps, backing the hypothesis. Short-term, inflated public borrowing and outlays hamper output, while improved external accounts and interest rates boost activity. However, currency depreciation slows near-term growth. Long-term, sustained budget and current account weaknesses, and higher borrowing costs drag on national output. But a weaker currency lifts competitiveness and long-run growth. To enable short and long-term expansion, findings underscored the criticality of fiscal prudence and constructive external positions.