An Examination of the Relationship between Budget Deficit and Total Investments in Transition: Case of Albania

Abstract

As in other transition economies, in the past and today; budget policy is widespread instrument of fiscal policy and still increases the rate of economic growth of the country. Moreover it has been acknowledged nowadays that the public debt growth is larger than the growth rate of the economy for most of the industrial countries. The budget deficit policy and the excessive public expenditure upon collected public revenues are initiated because of economic growth impact. This master thesis analyzed empirically the co-integrating relationship between budget deficit and investment in the Albanian economy in the period 1993-2012. Since the variables in this thesis are nonstationary and present a unit root, Johansen‟s co-integration technique has been applied. This methodology has allowed for obtaining a co-integrating relationship among these variables. The co-integration results provide evidence of a unique co-integrating vector. In more precise terms, a long-run stable relationship between budget deficit and investment exist and this indicates that budget deficit and investment move together.