Abstract

In this article, we have tested the causality correlation linking the internal deficit with the external deficit for a group of 15 African economies. Specifically, using causality analysis, we have tested the four possible causation linkages: (1) internal deficit causes external deficit, (2) there is bidirectional causality linking the two variables, (3) the two deficits are not causally related and (4) external deficits cause internal deficits. Using linear panel causality, this paper shows with heterogeneous Granger causality analysis that in five African countries, Côte d’Ivoire, Gambia, Morocco, Democratic Republic of Congo and Tunisia, external deficit Granger caused internal deficit. Two countries, Nigeria and Egypt, postulate causality from internal deficit to external deficit. While one country, South Africa, reveal a bidirectional causal link between internal deficit and external deficit. Monetary policies focused on the efficiency, as well as the exchange rate, will help to re-build, harmonize and control the budget policy in African countries.

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