The effects of government budget deficit on current account : new evidence from selected countries of the MENA region, 1994-2013

Abstract

This thesis investigates the relationship between government budget and the current account for a group of small open-developing economies selected from the Middle East and North Africa. These countries are divided into two categories, including one the one hand, six oil exporting countries and on the other, eight non-oil exporting countries, in the period from 1994 to 2013. Specifically, this thesis tests the view of Ricardian infinite horizon illustrative agent model in which lower public savings are met by equal increases in private savings, and as a result the current account does not respond to the changes in government spending. In contrast, a Keynesian conventional viewpoint, in which there is a fall in public savings, has a conflicting effect on the current account. New evidence from a panel data analysis supports the conventional approach of a positive relationship between government budget and current account in oil countries. However, our results don’t support the Ricardian or Keynesian views for non-oil countries; our estimates support “Twin divergence” rather than “twin deficits” in case of non -oil exporting countries. Our estimates show that a rise by one US billion dollars of the government budget deficit increases the current account to deteriorate by 0.72 US billion dollars in the case of oil exporting countries. On the other hand, the rise by one US billion dollars of the government budget deficit improves the current account by 0.29 US billion dollars in case of non-oil exporting countries