Fiscal Deficit-Economic Growth Nexus in Zimbabwe: A Vector Auto Regression Analysis

Abstract

The main objective of the study is to investigate the relationship between fiscal deficit and economic growth in Zimbabwe for the period 1980-2015. The study employs Vector Auto Regression (VAR) model coupled with variance decomposition and impulse response functions to analyze the relationship. Before estimation is done the variables are tested for unit root using the Augmented Dickey-Fuller (ADF) test. The ADF tests results reveal that both budget deficit and economic growth are integrated of order one. However the test of Johansen co-integration test shows that there is no co-integration between the variables implying the use of Unrestricted VAR. The regression results reveal that there is a negative relationship between budget deficit and economic growth. This supports the Neoclassical hypothesis. In line with this, the study recommends the fiscal authorities to strengthen fiscal framework, display a high sense of transparency in the fiscal operations and enhance strategies for better government expenditure