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Does The Causal Relationship Between The Twin Deficits Vary Over Time? Evidence From A Bootstrap Rolling Window Approach

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  • TIE-YING LIU

    (School of Economics and Management, Beijing Jiaotong University, No. 3, Shangyuancun, Haidian District, Beijing 100044, P. R. China)

  • ZI-CHEN GU

    (School of Economics and Management, Beijing Jiaotong University, No. 3, Shangyuancun, Haidian District, Beijing 100044, P. R. China)

Abstract

This paper uses the bootstrap rolling window approach to analyze the dynamic causal relationship between the fiscal deficit and the trade deficit in the US from 1901 to 2018. We find the origination and termination of each causality period by considering the structural breaks. The results show that the fiscal deficit had a positive impact on the trade deficit from 1946 to 1956, from 1982 to 1998, in 2000 and from 2002 to 2008, which is in accord with the results of the Mundell–Fleming model, while it had a negative impact from 1937 to 1945. The trade deficit had a positive impact on the fiscal deficit from 1940 to 1942, from 1959 to 1975 and from 1981 to 1994, mainly due to the World War II, oil crisis and trade friction with Japan. It means that the fiscal policy of American federal government can affect the external imbalance.

Suggested Citation

  • Tie-Ying Liu & Zi-Chen Gu, 2023. "Does The Causal Relationship Between The Twin Deficits Vary Over Time? Evidence From A Bootstrap Rolling Window Approach," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 68(05), pages 1613-1635, September.
    • Handle: RePEc:wsi:serxxx:v:68:y:2023:i:05:n:s0217590820500435
    DOI: 10.1142/S0217590820500435
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    More about this item

    Keywords

    Fiscal deficit; trade deficit; rolling window approach;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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