An empirical analysis of the twin deficit hypothesis: Evidence from Uganda (1990 – 2020)

Abstract

This study intended to extend the discussion of the twin deficit hypothesis – an assertion that there is a positive long run relationship between the budget and current account deficits. This follows not only the perpetual surge in both deficits that has hampered inclusive growth in the previous decades in Uganda, but also the inconclusiveness, and mixed findings, which characterise the available scholarly evidence regarding the twin deficit hypothesis. Annual time series data from 1990 to 2020 from the WDI database of the World Bank, and Bank of Uganda was used to test for the validity of the twin deficit hypothesis. Utilizing the ARDL modelling techniques coupled with its associated ARDL bounds test for cointegration, this study’s key finding was that Uganda experiences a twin divergence in the long run. Based on the key findings, this study recommends that government and development partners should enhance Uganda’s trade global competitiveness, more support to indigenous investors, pursuing low and stable interest rates to attain macroeconomic stability.