An empirical investigation of budget and trade deficits: the case of Nigeria

This paper uses cointegration and vector error-correction techniques, Granger-causality tests and, generalized impulse response analysis to examine the ìtwin deficitsî phenomenon in Nigeria - a small open but oil dependent economy in Africa. We find evidence of positive relationship between trade and budget deficits in both the short- and long-run. This finding supports the conventional Keynesian twin deficits proposition and refutes the Ricardian Equivalence Hypothesis. Contrary to the conventional proposition that budget deficits cause trade deficits, our results indicate unidirectional causality from trade deficits to budget deficits for Nigeria. An implicit policy implication of our findings is that attempts to reduce budget deficits in Nigeria must begin with reductions in trade deficits which could be achieved through indirect monetary channels.