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How budget deficit and current account deficit are interrelated in Indian economy

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  • U.J. BANDAY

    (Jamia Millia Islamia University Delhi, India)

  • Ranjan ANEJA

    (Central University of Haryana, India)

Abstract

The development in Indian economy brings the question of validity of the twin deficit hypothesis. The main aim of the article is theoretical and empirical analysis of the causal relationship between the budget deficit and the current account deficit in the Indian economy from the period 1990-2013. A co-integration test suggests that both the variables have a long run association between each other and move with each other for a long period of time. The Granger causality test clearly finds the existence of bidirectional relationship between the twin deficit variables. The results indicate that twin deficit hypothesis exists in India as opposed by direction between budget deficit and current account deficit. The study finds the government need to find adequate monetary and fiscal policy for policy variables.

Suggested Citation

  • U.J. BANDAY & Ranjan ANEJA, 2016. "How budget deficit and current account deficit are interrelated in Indian economy," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(606), S), pages 237-246, Spring.
    • Handle: RePEc:agr:journl:v:xxiii:y:2016:i:1(606):p:237-246
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    References listed on IDEAS

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    1. Ahmad Baharumshah & Evan Lau & Ahmed Khalid, 2006. "Testing Twin Deficits Hypothesis using VARs and Variance Decomposition," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 11(3), pages 331-354.
    2. Anoruo, Emmanuel & Ramchander, Sanjay, 1998. "Current account and fiscal deficits: Evidence from five developing economies of Asia," Journal of Asian Economics, Elsevier, vol. 9(3), pages 487-501.
    3. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
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    Cited by:

    1. Umer Jeelanie Banday & Ranjan Aneja, 2019. "Twin deficit hypothesis and reverse causality: a case study of China," Palgrave Communications, Palgrave Macmillan, vol. 5(1), pages 1-10, December.
    2. Mallick, Lingaraj & Behera, Smruti Ranjan & Murthy, R.V. Ramana, 2021. "Does the twin deficit hypothesis exist in India? Empirical evidence from an asymmetric non-linear cointegration approach," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    3. Yusuf D. Bulus & Nnaemeka E. Ohaegbu & Olufunmilayo S. Tajudeen & Chinecherem D. Okoronkwo & Danjuma S. Yusuf, 2023. "Fiscal Deficit Expansion and External Sector Imbalance in Nigeria: Implications for Monetary Policy," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(5), pages 1687-1703, May.
    4. Ashima Goyal & Abhishek Kumar, 2018. "The effect of oil shocks and cyclicality in hiding Indian twin deficits," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 45(1), pages 27-45, January.
    5. Umer J. Banday & Ranjan Aneja, 2017. "Does Fiscal Deficit Affect Current Account Deficit in India? An Econometric Analysis," Review of Market Integration, India Development Foundation, vol. 9(3), pages 155-174, December.
    6. Maran Marimuthu & Hanana Khan & Romana Bangash, 2021. "Reverse Causality between Fiscal and Current Account Deficits in ASEAN: Evidence from Panel Econometric Analysis," Mathematics, MDPI, vol. 9(10), pages 1-18, May.

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