Authors: P.K. Santhosh Kumar
Addresses: Department of Economics, Christ University, Bangalore, 560076, India
Abstract: The purpose of this study is to examine the relationship between budget deficit and trade deficit commonly known as 'twin deficits hypotheses' in Indian economy. We used time series data for the period of 1970 to 2013. The empirical results of this study follow the autoregressive distributed lag (ARDL) cointegration technique for long run and short run estimates and error correction mechanism (ECM). In this study, we check the hypotheses that trade deficit is the determinant of budget deficit with its current values or the lag values. The results of the ARDL model confirm that there is the positive and significant relationship between trade deficit and budget deficit. So twin deficits hypothesis is valid for India. The ARDL results of the short run confirm the hypothesis that trade deficit can determine the budget deficit in the case of India. The results of the long run estimates are also significant. The error correction specification is used to find evidence of long-run causality running from budget deficit to trade deficit and vice versa. The empirical results suggest that trade deficit can determine the budget deficit in case of India.
Keywords: budget deficit; trade deficit; autoregressive distributed lag; ARDL; cointegration; twin deficit hypothesis; India.
Global Business and Economics Review, 2016 Vol.18 No.3/4, pp.487 - 495
Received: 23 Feb 2015
Accepted: 24 Sep 2015
Published online: 29 Apr 2016 *