Verification of Causality through VAR and Intervention Analysis: Econometric Modeling on Budget Deficit and Trade Deficit in Nepal
Direction of causality between budget deficit and trade deficit, which is popularly known as Twin Deficit Hypothesis (TDH), has been tested in this paper covering the period 1964-2004. Stationarity, co-integration, and error correction tests have been performed as fundamental groundwork on real-term datasets. Datasets are found to be stationary at first difference. Long-run relationship (co-integration) among model variables is found at first difference. Long-run stability has been supported since short-run dynamics indicated converging pattern. Residual tests and conventional Granger Causality tests suggested trade deficit has been Granger Caused by the budget deficit. This initial gesticulation has further been reinforced by the vector autoregressive (VAR) modeling and intervention analysis (impulse response function and variance decomposition) also as it has reconfirmed unidirectional causality from budget deficit to trade deficit indicating need of a policy revisit regarding efficient public expenditure management, export-led growth and strategic capital formation with the help of revised fiscal, monetary and financial policies in the present globalization context.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kawai, Masahiro & Maccini, Louis J, 1995. "Twin Deficits versus Unpleasant Fiscal Arithmetic in a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 639-58, August.
- Durlauf, Steven N & Phillips, Peter C B, 1988.
"Trends versus Random Walks in Time Series Analysis,"
Econometric Society, vol. 56(6), pages 1333-54, November.
- Steven N. Durlauf & Peter C.B. Phillips, 1986. "Trends Versus Random Walks in Time Series Analysis," Cowles Foundation Discussion Papers 788, Cowles Foundation for Research in Economics, Yale University.
- Shrestha, Min B. & Chowdhury, Khorshed, 2005. "Sequential Procedure for Testing Unit Roots in the Presence of Structural Break in Time Series Data," Economics Working Papers wp05-06, School of Economics, University of Wollongong, NSW, Australia.
- Perron, P., 1994.
"Further Evidence on Breaking Trend Functions in Macroeconomic Variables,"
Cahiers de recherche
9421, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
- Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
- Perron, P., 1990. "Further Evidence On Breaking Trend Functions In Macroeconomics Variables," Papers 350, Princeton, Department of Economics - Econometric Research Program.
- Miller, Stephen M, 1991. "Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 139-54, May.
- Thomas Palley, 2001. "The Case Against Budget Surpluses," Challenge, M.E. Sharpe, Inc., vol. 44(6), pages 13-27, November.
- Carlos Fonseca Marinheiro, .
"Ricardian Equivalence: An Empirical Application to the Portuguese Economy,"
International Economics Working Papers Series
ces0112, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
- Carlos Fonseca Marinheiro, 2001. "Ricardian Equivalence: an Empirical Application to the Portugese Economy," Center for Economic Studies - Discussion papers ces0112, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Les Oxley & David Greasley, 1998. "Vector autoregression, cointegration and causality: testing for causes of the British industrial revolution," Applied Economics, Taylor & Francis Journals, vol. 30(10), pages 1387-1397.
When requesting a correction, please mention this item's handle: RePEc:nrb:journl:v:21:y:2009:p:1. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dr. Bishnu Prasad Gautam)
If references are entirely missing, you can add them using this form.