Thesis (M.Sc)-Cairo University, 2024.

Bibliography: pages 92-108.

This study employs a Panel Vector Auto-regression (PVAR) model in attempting to explore and provide new evidence of the empirical relationship between government consumption shock and the trade balance. The focus of this study is twofold; firstly, to investigate the impact of government consumption shock on the trade balance. The results showed that an expansionary government consumption shock improves the trade balance. Secondly, to investigate whether the degree of trade openness has an impact on the potency of the government consumption shock. The results showed that the government consumption shock is more potent on the output in relatively closed economies. Also, the degree of trade openness alters the direction of the effect of the government consumption shock on the trade balance. In relatively closed economies, an expansionary government consumption shock improves the trade balance; while in relatively more open economies, the shock induces the trade balance to deteriorate.
This thesis contributes to the literature on the relationship between government consumption and the trade balance using the latest time series data and a sample of various developed and developing countries, unlike many studies that focused on the developed countries only, such as the OECD, European countries, and the United States of America. Additionally, the focus in this study is on the government consumption element only from fiscal policy and on the trade balance only from the current balance in order to analyze the relationship and obtain more accurate results. The importance of studying the relationship between government consumption and the trade balance is to determine the effectiveness of government consumption as a tool of fiscal policy in addressing the problems of the country's external deficit
This thesis consists of three main chapters. The first chapter presents different theories and hypotheses that discuss the relationship between the two variables under study. Keynesian theory and Mundell-Fleming model suggest an inverse relationship between the above-mentioned variables. As an increase in government consumption leads to an increase in aggregate demand, an increase in income, and thus an increase in demand for imports and a deterioration in the trade balance. As for the hypotheses, the twin deficit hypothesis states that the budget deficit (increased government spending) and the current balance deficit (represented by the trade balance as its largest component) both occur together and move together in the same direction. As for the Ricardian equivalence hypothesis, it is claims that there is no relationship or effect between the movement of government consumption and the trade balance.
The second chapter views the literature that tackled the relationship between government consumption and the trade balance. Literature is divided into three schools in presenting the relationship and its findings. The first school finds an inverse relationship, that is, the increase in government consumption leads to a deterioration in the trade balance, either because of the increase in aggregate demand resulting from the increase in government consumption (including increased revenues), or because of the appreciation of the exchange rate and the relative prices of foreign and domestic goods. The second group presents a positive relationship between government consumption and the trade balance, assuming that increasing government consumption leads to an increase in the interest rate and encouraging consumers to reduce consumption and increase investment. Finally, the third school follows the Ricardian equivalence hypothesis and supports the non-existence of any relationship between the two variables.
The third chapter presents research methodology and results. The research methodology in this thesis employs a Panel VAR model on annual data from 50 different developed and developing countries. The study uses five main variables: government consumption, trade balance (exports + imports as a ratio to GDP), GDP, interest rate, and exchange rate. The model was applied to data from all countries to find that the government consumption shock leads to an improvement in the trade balance. Then the sample was divided into more open and less open countries and the same model was applied to each group separately to try to analyze whether the degree of trade openness has a role in determining the potency of the government consumption shock. Indeed, the potency of government consumption varies with different degrees of trade openness, as it is stronger on GDP in more closed economies. As for its impact on the trade balance, the government consumption shock leads to an improvement in the trade balance in less open economies. But in more open economies, the shock leads to a deterioration in the trade balance.

تستخدم هذه الدراسة نموذج الانحدار الذاتي القياسي (PVAR) في محاولة لاستكشاف وتقديم أدلة جديدة على العلاقة التطبيقية بين صدمة الاستهلاك الحكومي والميزان التجاري. وتركز هذه الدراسة على شقين؛ أولا، التحقيق في تأثير صدمة الاستهلاك الحكومي على الميزان التجاري. وأظهرت النتائج أن صدمة الاستهلاك الحكومي التوسعية تحسن الميزان التجاري. ثانيا، التحقيق فيما إذا كانت درجة الانفتاح التجاري لها تأثير على قوة صدمة الاستهلاك الحكومي. وأظهرت النتائج أن صدمة الاستهلاك الحكومي أقوى على الناتج في الاقتصادات المغلقة نسبيا. كما أن درجة الانفتاح التجاري تغير اتجاه تأثير صدمة الاستهلاك الحكومي على الميزان التجاري. في الاقتصادات المغلقة نسبيا، تعمل صدمة الاستهلاك الحكومية التوسعية على تحسين الميزان التجاري؛ بينما في الاقتصادات الأكثر انفتاحا نسبيا، تؤدي الصدمة إلى تدهور الميزان التجاري.

Issues also as CD.

Text in English and abstract in Arabic & English.