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The Budget Deficit and the Trade Deficit: Insights into This Relationship

Author

Listed:
  • Nazma Latif-Zaman

    (Providence College)

  • Maria N. DaCosta

    (University Wisconsin, Eau Claire)

Abstract

This paper addresses the issue of concomitant high budget and trade deficits in the United States. Is it just a coincidence or is there any systematic relationship? The paper employs a bi-error criterion with quarterly data for the U.S. to determine whether a causal relationship exists between trade deficit and budget deficit. The empirical analysis indicate that the trade and budget deficit are related and also finds support for the conventional prpoposition that high budget deficits have caused high trade deficits. However, results do not suggest any feed back from trade to budget deficit. Consequently, budget deficit plays an important role in the budget-trade relationship.

Suggested Citation

  • Nazma Latif-Zaman & Maria N. DaCosta, 1990. "The Budget Deficit and the Trade Deficit: Insights into This Relationship," Eastern Economic Journal, Eastern Economic Association, vol. 16(4), pages 349-354, Oct-Dec.
    • Handle: RePEc:eej:eeconj:v:16:y:1990:i:4:p:349-354
    as

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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume16/V16N4P349_354.pdf
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    References listed on IDEAS

    as
    1. William A. Niskanen, 1988. "The Uneasy Relation between the Budget and Trade Deficits," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 507-532, Fall.
    2. Cebula, Richard J, 1991. "Federal Government Budget Deficits and Interest Rates: Reply," Public Finance = Finances publiques, , vol. 46(2), pages 331-334.
    3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    4. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-552, September.
    5. Michael M. Hutchison & Charles Pigott, 1984. "Budget deficits, exchange rates and the current account: theory and U. S. evidence," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 5-25.
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    Cited by:

    1. Tosun, M. Umur & Iyidogan, Pelin Varol & Telatar, Erdinç, 2014. "The Twin Deficits in Selected Central and Eastern European Economies: Bounds Testing Approach with Causality Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 141-160, June.
    2. Şen, Hüseyin & Kaya, Ayşe, 2016. "Are the twin or triple deficits hypotheses applicable to post-communist countries?," BOFIT Discussion Papers 3/2016, Bank of Finland Institute for Emerging Economies (BOFIT).

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