TWIN DEFICITS PHENOMENON IN WEST AFRICAN ECONOMIC AND MONETARY UNION COUNTRIES: PANEL DATA ANALYSIS

For long period of time,West African Economic and Monetary Union (WAEMU)countries have been experiencing persistently high budget and current deficits. Thisstudy was undertaken to empirically test the “Twin Deficits Hypothesis”in thesecountries. The analysis is conducted within the framework of Panel VARapproach over the period 1975-2013. In contrast to the conventional view which claims a one-way relationship between budget and current account deficits,the results show that budget deficits leads to a deterioration in the current account balance, and vice-versa(bilateral relationship). In addition, the association between the two deficits appears stronger when grants (aid) are taken into account in the estimation. Overall, the relation between budget and current account deficits found in this study is weaker than expected. In assessing the transmission mechanism, we found that budget deficits impact on current account deficits mainly through imports, in line with the Keynesian absorption theory.