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Do Budget Deficits Affect Current Account Deficit? Some Evidence for Bhutan

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  • Kanchan Datta
  • Bimal Sarkar
  • Subhashis Dey

Abstract

There are many studies concerning the relationship between Budget Deficit (BD) and Trade Deficit (TD). The overall findings can be classified under two broad hypotheses. One is known as twin deficit hypothesis which implies there exists a relationship between BD and TD, and BD Granger-causes TD. On the other hand, there is an alternative hypothesis known as Ricardian Equivalence Theorem which negates any such relation. The present study involves IFS data, where the real BD and Current Account Deficit (CAD) data series are used. This study is based on a battery of tests like ADF, PP unit root test, followed by the estimation of cointegration, Granger causality, etc. This study supports that CAD is responsible for BD in Bhutan over the period of the study.

Suggested Citation

  • Kanchan Datta & Bimal Sarkar & Subhashis Dey, 2012. "Do Budget Deficits Affect Current Account Deficit? Some Evidence for Bhutan," The IUP Journal of Bank Management, IUP Publications, vol. 0(4), pages 110-120, November.
    • Handle: RePEc:icf:icfjbm:v:11:y:2012:i:4:p:110-120
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