Modeling twin deficit hypothesis with oil price volatility in African oil-producing countries

Abstract

The study examines the dynamic connection between fiscal and current account deficits conditioned on oil price fluctuation in selected African oil-producing countries. Annual data for twelve African oil-producing countries for the period 1981–2018 are used. Using the Dynamic Fixed Effect and the Augmented Mean Group techniques due to cross-sectional dependence, results validate the twin deficits hypothesis for the selected African oil-producing countries. Panel data granger causality result also supports a bidirectional connection between the fiscal and the current account deficits. Thus, structural reforms are needed to spur national savings and diversify the export sectors of these countries. It is also imperative that positive oil price shocks are not assumed to be permanent shocks so as to smoothen consumption and implement a robust fiscal rule and framework for managing excess crude oil prices for stabilization.