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Twin Deficits or Distant Cousins? Evidence from India

  • Artatrana Ratha


    (Department of Economics, St. Cloud State University)

The twin-deficits theory has intrigued economists and policy-makers alike for the past few decades. In a Keynesian economy, budget deficit increases the absorption of the economy, causes import expansions, and thereby, worsens the trade deficit. It also causes domestic interest rates to rise, domestic currency to appreciate, and thereby, contributes to trade deficits. Using monthly data over 1998-2009 and the bounds testing approach to cointegration, we find evidence that the twin-deficits theory holds for India in the short-run. Evident of the Ricardian Equivalence Hypothesis (REH), it appears that no such relation exists the long run.

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Paper provided by Saint Cloud State University, Department of Economics in its series Working Papers with number 2010-5 Classification- F 32, H 62.

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Date of creation: 04 Mar 2010
Date of revision:
Handle: RePEc:scs:wpaper:1005
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