Threshold cointegration and the short-run dynamics of twin deficit hypothesis in African countries

This paper examines the relationship between the fiscal deficit and the current account deficit using the threshold cointegration approach of Hansen and Seo (2002). Using quarterly data for nine African countries for the period 1980-2009, a long-run positive cointegrating relationship is established for six out of the nine countries examined, while the relationship is negative for the other three. This provides qualified support for the twin convergence hypothesis. Threshold error correction effects show some diversity in the speed of adjustment of the current account relative to the speed of adjustment of the fiscal deficit. This may be a reflection of differences in the way fiscal policy issues are handled across the countries.