An empirical analysis of the nexus between current account deficit and budget deficit: the case of Tunisia

This study investigates the causal relationships between current account deficit and budget deficit using annual data for Tunisia over the 1986-2018 period. The analysis relies on the ARDL-bounds testing approach to cointegration of Pesaran, Smith and Shin (2001), and the Granger non-causality tests of Toda and Yamamoto (1995). The ARDL procedure confirms the existence of long-run and short-run relationships between the current account deficit and the budget deficit. Besides, Granger non-causality tests upheld the presence of the twin deficit hypothesis. Our empirical findings hold important policy implications; they suggest that the Tunisian government should implement a range of measures aimed at reducing the budget deficit in order to help correct the current account deficit. JEL Classifications: C32, E62, F32, H62