The sustainability of trade deficits in the presence of endogenous structural breaks: Evidence from the Indian economy
This study examines the long-run relationship between exports and imports of the Indian economy during 1950–51 to 2008–09. Applying unit root test and cointegration technique that allows for endogenously determined structural break in the relationship, the results do not support the existence of any long-run equilibrium relationship between exports and imports and interest payments on net debt for India. Individually exports and imports have multiple breaks clustered roughly around three periods: early and mid seventies – the ‘comfort period’ in the country's balance of payments; 1986–87 that witnessed a sudden jump in exports trend after experiencing a flat trend in the first half of 1980s; and 1997–98 following the East Asian currency crisis. The findings imply that India's macroeconomic policies have not been very effective to ensure sustainability of trade deficit in the long-run and suggest that India is in violation of its international budget constraint.
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