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Article Title:
The Relationship between Budget Deficits and Macroeconomics Variables in United Arab Emirates: An Empirical Investigation
by Majeed Ali Hussain and Afaf Abdull J. Saaed

Abstract:
Few are the econometric studies which have examined the relationship between budget deficit and macroeconomic variables exchange rate(ER), consumer price index(CPI), economic growth(GDP),and money supply(M3). This study examine empirical relationship among exchange rate, consumer price index, economic growth, money supply and budget deficit in United Arab Emirates (UAE) over the period 1985-2011.The data where sourced from Central Bank of Emirates(various issues), IFS , IMF and Arab Monetary Fund(AMF).in order to clarify whether exchange rate ,money supply, consumer price index cause budget deficit or vise- versa .a cointegration approach and Variance Error Correction Models (VECM) is developed.Moreover,Granger causality technique is used to assess the direction of the causality The findings provide evidence to support the variables under study are cointegrated and there is no directional causality between budget deficit and nominal effective exchange rates. the results from variance decomposition method. GDP and exchange rates produce 19.24% and 68.23 of variance in budget deficit at the end of ten periods, interestingly, the effect of GDP on the variance of money supply has been decreasing for the first five time periods and remains constant for the next five periods. The predictions will help the policy makers as well as quantitative analysts in determining the stance of monetary policy as well as fiscal policy. Policy makers, economists and analysts may take a cue from these studies, and have to necessarily keep themselves watchful of the changes in the macroeconomic fundamentals. However, we have not observed any significant relationship between budget deficit and GDP, Money supply & consumer price index

Keywords: budget deficits, nominal effective exchange rates, vector error correction Model (VECM), Co integration analysis.

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