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Twin Deficits or Distant Cousins? Evidence from India

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  • Artatrana Ratha

    () (Department of Economics, St. Cloud State University)

Abstract

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.

Suggested Citation

  • Artatrana Ratha, 2010. "Twin Deficits or Distant Cousins? Evidence from India," Working Papers 2010-5 Classification- F , Saint Cloud State University, Department of Economics.
  • Handle: RePEc:scs:wpaper:1005
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    File URL: http://repository.stcloudstate.edu/cgi/viewcontent.cgi?article=1004&context=econ_wps
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    References listed on IDEAS

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    Cited by:

    1. repec:kap:iaecre:v:19:y:2013:i:3:p:289-310 is not listed on IDEAS
    2. El-Baz, Osama, 2014. "Empirical Investigation of the Twin Deficits Hypothesis: The Egyptian Case (1990-2012)," MPRA Paper 53428, University Library of Munich, Germany.
    3. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.
    4. Cosimo Magazzino, 2012. "Fiscal Policy, Consumption and Current Account in the European Countries," Economics Bulletin, AccessEcon, vol. 32(2), pages 1330-1344.

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