Hypothesis of Twin Deficits in Cote d’Ivoire: The Nonlinear Effect Analysis with a Smooth Transition Autoregression Model (STAR)

Abstract

This paper tests the hypothesis of double deficit in Côte d'Ivoire in non-linear aid framework, using an autoregressive smooth transition model (STAR). The main results validate the hypothesis of double deficit in Côte d' Ivoire. The effect of current balance on budget balance is greater than budget balance on current balance. Moreover, the rapid effects of current account instability on fiscal balance reveal the lack of expectation by economic agents that leads to current account deterioration compared to the deterioration of budget balance.  Thus, economic policies aimed at influencing the effect on current balance would be more effective than those aimed at the effect on budget balance. In other words, Ivorian economy adopts a Keynesian performance in the event of current account shocks and performance that tend to be more or less Ricardian in presence of fiscal policy shock.