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Twin Deficits or Distant Cousins? Evidence from India

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  • Artatrana Ratha

    ()
    (Department of Economics, St. Cloud State University)

Abstract

The twin-deficits theory has intrigued economists and policy-makers alike for the past few decades. In a Keynesian economy, budget deficit increases the absorption of the economy, causes import expansions, and thereby, worsens the trade deficit. It also causes domestic interest rates to rise, domestic currency to appreciate, and thereby, contributes to trade deficits. Using monthly data over 1998-2009 and the bounds testing approach to cointegration, we find evidence that the twin-deficits theory holds for India in the short-run. Evident of the Ricardian Equivalence Hypothesis (REH), it appears that no such relation exists the long run.

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File URL: http://repository.stcloudstate.edu/cgi/viewcontent.cgi?article=1004&context=econ_wps
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Bibliographic Info

Paper provided by Saint Cloud State University, Department of Economics in its series Working Papers with number 2010-5 Classification- F 32, H 62.

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Date of creation: 04 Mar 2010
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Handle: RePEc:scs:wpaper:1005

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Keywords: Bounds-Testing; Budget Deficit; Fiscal Stimulus; India; Trade Deficit; Twin Deficits;

References

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  1. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
  2. Mohsen Bahmani-Oskooee & Artatrana Ratha, 2004. "The J-Curve: a literature review," Applied Economics, Taylor & Francis Journals, vol. 36(13), pages 1377-1398.
  3. Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993. "Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 580-94, October.
  4. Paresh Kumar Narayan & Seema Narayan, 2007. "Is devaluation expansionary or contractionary? Empirical evidence from Fiji," Applied Economics, Taylor & Francis Journals, vol. 39(20), pages 2589-2598.
  5. Kearney, Colm & Monadjemi, Mehdi, 1990. "Fiscal policy and current account performance: International evidence on the twin deficits," Journal of Macroeconomics, Elsevier, vol. 12(2), pages 197-219.
  6. Cebula, Richard J. & Rhodd, Rupert G., 1993. "A note on budget deficits, debt service payments, and interest rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(4), pages 439-445.
  7. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
  8. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  9. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
  10. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 53-68, July.
  11. Bundt, Thomas & Solocha, Andrew, 1988. "Debt, deficits and the dollar," Journal of Policy Modeling, Elsevier, vol. 10(4), pages 581-600.
  12. Evans, Paul, 1988. "Are Consumers Ricardian? Evidence for the United States," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 983-1004, October.
  13. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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Cited by:
  1. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer, vol. 19(3), pages 289-310, August.
  2. Cosimo Magazzino, 2012. "Fiscal Policy, Consumption and Current Account in the European Countries," Economics Bulletin, AccessEcon, vol. 32(2), pages 1330-1344.

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