An Empirical Estimation of the Optimum Level of Budget Deficit in Liberia

Economic theory establishes that high fiscal deficit is one of the causes of macroeconomic instability. Empirical findings, however, do not prodigiously support this assertion as results from various studies are mixed and inconclusive across countries These inconsistent results have underscored the expediency of time series data for country specific studies to address the problem. This paper investigates the threshold level of Budget deficit that is favourable for growth in Liberia. The threshold level of budget deficit conducive for economic growth was identified at 6.0 percent. The findings of this paper provide sufficient evidence in support of the proposition that budget deficit beyond certain threshold is inauspicious to growth. This suggests that the Liberian authorities should endeavour to implement policy measures aimed at reducing Budget deficits to levels not exceeding 6.0 per cent (levels consistent with economic growth).