ABSTRACT
The study investigated the relationship between twin deficit and manufacturing sector of Nigerian economy for the period of 34 years (1981 to 2015). The study adopted the time series data using the OLS estimation technique to analyze the data. The model was estimated using a linear specification methodology. It was discovered Current account deficit and fiscal deficit exerts a negative and significant relationship with manufacturing output in Nigeria while Real Gross Domestic Product has a positive and significant relationship with manufacturing output in Nigeria. The study recommended that Government should endeavor to live within its means. Persistent budget deficit may lead to chronic current account disequilibrium which may further inhibit economic growth. Government must ensure that it pursues fiscal policies that align expenditure with revenue.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The “Twin deficit” debate was a common policy issue during the 1980s and the early 1990s and the term was initially invented to describe the co-movement between the budget deficit and the current account deficit in the United States (Chang and Hsu, 2009). Subsequently, researchers began applying it to other countries. Ever since, it has become an area of interest for researchers to examine the causal link between the two deficits and the direction of causality. The simultaneous emergence of budget deficit and the current account deficits for most countries most especially in the United States (US) during the mid-1980s led to the characterization of this phenomenon as the “twin deficits” issue as both economic theory and empirical observation suggested a link between the two deficits (Chinn, 2005). Thus, the twin deficit hypothesis has come to be regarded as one of the important relationships among aggregate economic variables. Over the years, there has however been renewed interest in understanding the relationship between the budget and current account deficit.According to Kim et al (2007), fiscal deficits tend to occur jointly with current account deficits. Giarcarlo et al., (2006) also argued that fiscal shocks will cause a deterioration of the government’s budget and also worsen the country’s current account balance. Thus, the main thrust of the twin deficit hypothesis, however, is that current account deficits of most countries is caused by government’s budget deficits phenomenon and the most suitable way to solve this problem and stabilize internal and external deficits is reducing the government’s budget deficit (Zamanzadeh and Mehrara, 2011).
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