The Impact of Budget Deficit on Current Account Balance in Selected Countries

Abstract

This study empirically surveyed the impact of the budget deficit on the current account balance in the selected countries. The Panel ARDL model, as proposed by Pesaran and Shin (1999), was employed for model estimation, and annual time series data spanning from 1995 to 2019 was used. The budget deficit (BD) and other measures of the budget deficit (revenue deficit, fiscal deficit, and primary deficit) were used as proxies for the budget deficit, while CAB is a proxy for the current account balance. The budget deficit was decomposed into revenue deficit, fiscal deficit, and primary deficit to critically examine the effects of the budget deficit on the current account balance. The results from the Pedroni (1999; 2004) cointegration test led to the rejection of HO of no cointegration. We examined the long-run relationship between the budget deficit and the current account balance and discovered that there is a negative but significant relationship that exists between the budget deficit and the current account balance. Thus, interactive effects on the budget deficit were found to have a significant impact on the current account balance, but their yields are low compared to before interaction. The coefficient of ECT obtained is negative and significant, indicating a long-run relationship between the variables of the model.