ABSTRACT
The fundamental goal of the research was to verify if Twin Deficits Hypothesis holds for the economy of Zambia using Time Series data from 1980-2014. The current account and budget deficit were employed as key variables. The exchange rate was also used as a transmission mechanism to see how it contributes in the nexus. The empirical findings showed that there exist long run association between the current account deficit and the budget deficit after performing cointegration tests.
After fitting the VECM model, Granger causality tests confirmed existence of twin deficits for Zambia. The results supported uni-directional reverse causality. The exchange rate was shown to be very significant in the long run than in the short run.
The implosion of the time series as shown by the predicted cointegration equation implies that unless drastic measures to cure the deficits, using the current account as the major target variable, the twin deficits will persist for some time. The major policy implication of this research is that given Zambia as a primary Commodity Dependent Developing Country subsisting largely on copper revenues to sustain the economy, there is a need to move away from ‘copper addiction’ given volatility of earnings of primary commodities lately e.g. through diversification of the economy, import substitution among other strategies.
