The twin deficits hypothesis in developing countries: empirical evidence for Ghana

The issue of whether the long-run relationship between fiscal and current account deficits follow the tenets of the twin deficits hypothesis, the Ricardian equivalence, and the twin divergence hypothesis has in recent years become debatable both in the developed and, mainly the developing countries. In contributing to this ongoing debate, we use the case of Ghana over the period 1960-2012 as a sort of laboratory and, by employing relatively novel estimation techniques, namely cointegration techniques with allowance for structural break, we find that fiscal deficit improves the current account deficit. In other words, this paper provides evidence of the twin divergence hypothesis and therefore, adds to demonstrate the fact that the twin deficits hypothesis should not necessarily gain universal acceptability over the twin divergence counterpart.