Advertisement

Journal of Quantitative Economics

, Volume 17, Issue 3, pp 579–601 | Cite as

An Empirical Investigation of Twin Deficits Hypothesis: Evidence from India

  • Ranjan Kumar MohantyEmail author
Original Article
  • 151 Downloads

Abstract

The paper empirically examines the relationship between fiscal deficit and current account deficit in India for the period from 1970–1971 to 2013–2014. The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed to analyze the long run and short run relationship between the twin deficits. The results support the validity of twin deficits hypothesis in India, both in the short run and long run. Policy makers should adopt various measures to control fiscal deficit for correcting the current account deficit in India.

Keywords

Fiscal deficit Current account deficit Twin deficits hypothesis ARDL approach India 

Notes

Acknowledgements

The author is immensely grateful to Prof. Pradipta Chaudhury and Prof. N. R. Bhanumurthy for their valuable guidance and constructive suggestions. The author would wish to thank to the editor and anonymous referees for their useful comments and suggestions. Errors and omissions, if any, are my own doing.

References

  1. Abell, J.D. 1990. Twin deficits during the 1980 s: an empirical investigation. Journal of Macroeconomics 12: 81–96.CrossRefGoogle Scholar
  2. Anoruo, E., and S. Ramchander. 1998. Current account and fiscal deficits: evidence from five developing economies of Asia. Journal of Asian Economics 9: 487–501.CrossRefGoogle Scholar
  3. Aqeel, A., M. Nishat, and A. Qayyum. 2000. The twin deficits phenomenon: evidence from Pakistan. The Pakistan Development Review 39: 535–550.CrossRefGoogle Scholar
  4. Arora, H.K., and P. Dua. 1993. Budget deficits, domestic investment, and trade deficits. Contemporary Policy Issues 11: 29–44.CrossRefGoogle Scholar
  5. Basu, S., and D. Datta. 2005. Does fiscal deficit influence trade deficit? an econometric enquiry. Economic and Political Weekly 40: 3311–3318.Google Scholar
  6. Bernheim, B.D. 1988. Budget deficits and the balance of trade. Tax Policy and the Economy 2:1–31. http://www.nber.org/chapters/c10935.pdf.
  7. Bhagat, S., P. Ghosh, and S. Rangan. 2016. Economic policy uncertainty and growth in India. Economic and Political Weekly 51: 72–81.Google Scholar
  8. Bhavani, T.A., and N.R. Bhanumurthy. 2012. Financial access in post-reform India. New Delhi: Oxford University Press.CrossRefGoogle Scholar
  9. Busse, M., and C. Hefeker. 2007. Political risk, institutions, and foreign direct investment. European Journal of Political Economy 23: 397–415.CrossRefGoogle Scholar
  10. Catik, A.N., B. Gok, and U. Akseki. 2015. A nonlinear investigation of the twin deficits hypothesis over the business cycle: evidence from Turkey. Economic Systems 39: 181–196.CrossRefGoogle Scholar
  11. Darrat, A.F. 1988. Have large budget deficits caused rising trade deficits? Southern Economic Journal 54: 879–887.CrossRefGoogle Scholar
  12. Enders, W., and B.S. Lee. 1990. Current account and budget deficits: twins or distant cousins? The Review of Economics and Statistics 72: 373–381.CrossRefGoogle Scholar
  13. Feldstein, M., and C. Horioka. 1980. Domestic savings and international capital flows. The Economic Journal 90: 314–329.CrossRefGoogle Scholar
  14. Ghatak, A., and S. Ghatak. 1996. Budgetary deficits and Ricardian equivalence: the case of India, 1950–1986. Journal of Public Economics 60: 267–282.CrossRefGoogle Scholar
  15. Holmes, M.J. 2011. Threshold cointegration and the short-run dynamics of twin deficit behavior. Research in Economics 65: 271–277.CrossRefGoogle Scholar
  16. Kalou, S., and S.M. Paleologou. 2012. The twin deficits hypothesis: revisiting an EMU country. Journal of Policy Modeling 34: 230–241.CrossRefGoogle Scholar
  17. Khalid, A.M., and T.W. Guan. 1999. Causality tests of budget and current account deficits: cross country comparisons. Empirical Economics 24: 389–402.CrossRefGoogle Scholar
  18. Khan, M.A., and S. Saeed. 2012. Twin deficits and saving-investment nexus in Pakistan: evidence from Feldstein-Horioka puzzle. Journal of Economic Cooperation and Development 33: 1–36.Google Scholar
  19. Kouassi, E., M. Mougoue, and K.O. Kymn. 2004. Causality tests of the relationship between the twin deficits. Empirical Economics 29: 503–525.CrossRefGoogle Scholar
  20. Kulkarni, K.G., and E.L. Erickson. 2001. Twin deficit revisited: evidence from India, Pakistan, and Mexico. The Journal of Applied Business Research 17: 97–103.Google Scholar
  21. Kumar, P.K.S. 2016. Twin deficit hypothesis: some recent evidence from India. Global Business and Economic Review 18: 487–495.CrossRefGoogle Scholar
  22. Makin, A.J., and P. Narayan. 2013. Re-examining the “twin deficits” hypothesis: evidence from Australia. Empirical Economics 45: 817–829.CrossRefGoogle Scholar
  23. Marinheiro, C.F. 2008. Ricardian equivalence, twin deficits, and the Feldstein-Horioka puzzle in Egypt. Journal of Policy Modeling 30: 1041–1056.CrossRefGoogle Scholar
  24. Miller, S.M., and F.S. Russek. 1989. Are the twin deficits really related? Contemporary Policy Issues 7: 91–115.CrossRefGoogle Scholar
  25. Mukhtar, T., M. Zakaria, and M. Ahmed. 2007. An empirical investigation for the twin deficits hypothesis in Pakistan. Journal of Economic Cooperation Among Islamic Countries 28: 63–80.Google Scholar
  26. Narayan, P.K. 2005. The saving and investment nexus for China: evidence from cointegration tests. Applied Economics 37: 1979–1990.CrossRefGoogle Scholar
  27. Nikiforos, M., L. Carvalho, and C. Schoder. 2015. “Twin deficits” in Greece: in search of causality. Journal of Post Keynesian Economics 38: 302–330.CrossRefGoogle Scholar
  28. Onafowor, O.A., and O. Owoye. 2006. An empirical investigation of budget and trade deficits: the case of Nigeria. The Journal of Developing Areas 39: 153–174.CrossRefGoogle Scholar
  29. Parikh, A., and B. Rao. 2006. Do fiscal deficits influence current accounts? a case study of India. Review of Development Economics 10: 492–505.CrossRefGoogle Scholar
  30. Pesaran, M.H., Y. Shin, and R.J. Smith. 2001. Bound testing approaches to the analysis of level relationship. Journal of Applied Economics 16: 289–326.CrossRefGoogle Scholar
  31. Piersanti, G. 2000. Current account dynamics and expected future budget deficits: some international evidence. Journal of International Money and Finance 19: 255–271.CrossRefGoogle Scholar
  32. Ratha, A. 2012. Twin deficits or distant cousins? evidence from India. South Asia Economic Journal 13: 51–68.CrossRefGoogle Scholar
  33. Ravinthirakumaran, N., S. Selvanathan, and E.A. Selvanathan. 2016. The twin deficits hypothesis in the SAARC countries: an empirical investigation. Journal of the Asia Pacific Economy 21: 77–90.CrossRefGoogle Scholar
  34. Salvatore, D. 2006. Twin deficits in the G-7 countries and global structural imbalances. Journal of Policy Modeling 28: 701–712.CrossRefGoogle Scholar
  35. Sobrino, C.R. 2013. The twin deficits hypothesis and reverse causality: a short-run analysis of Peru. Journal of Economics, Finance and Administrative Science 18: 9–15.CrossRefGoogle Scholar
  36. Suresh, K.G., and V. Gautam. 2015. Relevance of twin deficit hypotheses: an econometric analysis with reference to India. Theoretical Economics Letters 5: 304–311.CrossRefGoogle Scholar
  37. Tiwari, A.K., K.G. Suresh, and M. Mutascu. 2015. A structural VAR analysis of fiscal shocks on current accounts in Greece. Theoretical and Applied Economics 22: 5–20.Google Scholar
  38. Trachanas, E., and C. Katrakilidis. 2013. The dynamic linkages of fiscal and current account deficits: new evidence from five highly indebted European countries accounting for regime shifts and asymmetries. Economic Modelling 31: 502–510.CrossRefGoogle Scholar
  39. Vamvoukas, G.A. 1987. Have large budget deficits caused increasing trade deficits? evidence from a developing country. Atlantic Economic Journal 25: 80–90.CrossRefGoogle Scholar
  40. Zietz, J., and D.K. Pemberton. 1990. The U.S. budget and trade deficits: a simultaneous equation model. Southern Economic Journal 57: 23–34.CrossRefGoogle Scholar

Copyright information

© The Indian Econometric Society 2018

Authors and Affiliations

  1. 1.National Institute of Public Finance and PolicyNew DelhiIndia

Personalised recommendations