St. Cloud State University e Repository at St. Cloud State University Economics Faculty Working Papers Department of Economics 1-1-2011 Twin Deficits or Distant Cousins? Evidence from India Artatrana Ratha St. Cloud State University, [email protected]is Article is brought to you for free and open access by the Department of Economics at e Repository at St. Cloud State University. It has been accepted for inclusion in Economics Faculty Working Papers by an authorized administrator of e Repository at St. Cloud State University. For more information, please contact [email protected]. Recommended Citation Ratha, Artatrana, "Twin Deficits or Distant Cousins? Evidence from India" (2011). Economics Faculty Working Papers. Paper 5. hp://repository.stcloudstate.edu/econ_wps/5
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Twin Deficits or Distant Cousins? Evidence from India · 2 This paper contributes to this literature by reexamining the twin-deficits theory for India, especially during the post-reforms
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St. Cloud State UniversityThe Repository at St. Cloud State University
Economics Faculty Working Papers Department of Economics
1-1-2011
Twin Deficits or Distant Cousins? Evidence fromIndiaArtatrana RathaSt. Cloud State University, [email protected]
This Article is brought to you for free and open access by the Department of Economics at The Repository at St. Cloud State University. It has beenaccepted for inclusion in Economics Faculty Working Papers by an authorized administrator of The Repository at St. Cloud State University. For moreinformation, please contact [email protected].
Recommended CitationRatha, Artatrana, "Twin Deficits or Distant Cousins? Evidence from India" (2011). Economics Faculty Working Papers. Paper 5.http://repository.stcloudstate.edu/econ_wps/5
* The title of the paper was inspired by Enders and Lee (1990). The author thankfully acknowledges valuable comments from an anonymous referee. The usual disclaimer applies.
Akaike Information Criterion (AIC) (18, 17, 15, 1, 16) 2.19
Notes: For the lag-structure (i, j, k, l, m) implies i lags for the first variable, j lags for the second, and so on; an * denotes significance at 5% levels; the corresponding critical value is 3.805.
Panel B: Quarterly Data (1998Q1-2009Q1)
Criterion Lag-Structure Calculated Value of the F-Statistic
Akaike Information Criterion (AIC) (4, 3, 3, 3, 1) 2.46
Notes: For the lag-structure (i, j, k, l, m) implies i lags for the first variable, j lags for the second, and so on; an * denotes significance at 5% levels; the corresponding critical value is 4.123.
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Table 2. Short Run Model
Panel A: Monthly Data (January, 1998 – September, 2009)
Dependent Variable is ∆LTBt
Coefficient of Chosen by SBC Chosen by AIC
∆LBDt -0.05 (1.38)
0.04 (0.92)
∆LBDt-1 - 0.24 (1.63)
∆LBDt-2 - 0.24 (1.72)
∆LBDt-3 - 0.27* (1.92)
∆LBDt-4 - 0.28* (2.10)
∆LBDt-5 - 0.26* (2.03)
∆LBDt-6 - 0.29* (2.41)
∆LBDt-7 - 0.32* (2.79)
∆LBDt-8 - 0.31* (2.89)
∆LBDt-9 - 0.32* (3.19)
∆LBDt-10 - 0.28* (2.96)
∆LBDt-11 - 0.24* (2.79)
∆LBDt-12 - 0.17* (2.29)
∆LBDt-13 - 0.11** (1.75)
∆LBDt-14 - 0.04 (0.92)
∆LBDt-15 - 0.05 (1.43)
ECMt-1 -0.58* (6.61)
-0.72* (6.48)
Note: LBDt = ln BDt; Only coefficients of ∆LBDt-i , i=0, 1, 2, … and the lagged error-correction term, ECMt-1 are reported. Figures in parentheses are absolute values of the t-statistic; Asterisks * and ** denote significance at the 5% and 10% levels, respectively; a dash (-) indicates the corresponding variable does not appear in the model; ∆LBDt. = LBDt-LBDt-1, ∆LBDt-1=LBDt-1-LBDt-2, and so on.
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Panel B: Quarterly Data (1998Q1-2009Q1)
Dependent Variable is ∆LTBt Coefficient of Chosen by SBC Chosen by AIC
∆LBDt 0.04** (1.87)
0.05** (1.89)
ECMt-1 -0.41* (2.88)
-0.34* (2.34)
Note: LBDt = ln BDt; ∆LBDt = LBDt-LBDt-1 . Only coefficients of ∆LBDt-i , i=0, 1, 2, … and the lagged error-correction term, ECMt-1 are reported. Figures in parentheses are absolute values of the t-statistic; Asterisks * and ** denote significance at the 5% and 10% levels, respectively.
Table 3. Long Run Model
Panel A: Monthly Data (January, 1998 – September, 2009)
Dependent Variable is ∆LTBt Coefficient of Chosen by SBC Chosen by AIC
Constant -4.31** (1.87)
0.41 (0.09)
LYt 0.45* (3.44)
0.76** (1.91)
LYFt 0.63
(0.96) -0.24 (0.14)
LRERt -0.07 (0.11)
-0.52 (0.85)
LBDt -0.05 (1.38)
-0.24 (1.25)
Note: LYt = ln Yt, LYFt = ln YFt, etc.; figures in parentheses are the absolute value of the t-statistics.
Panel B: Quarterly Data (1998Q1-2009Q1)
Dependent Variable is ∆LTBt Coefficient of Chosen by SBC Chosen by AIC
Constant -0.85 (0.27)
-5.65 (1.10)
LYt 1.11* (2.71)
1.12* (2.21)
LYFt 0.30
(0.22) 0.26
(0.15)
LRERt -1.16 (1.11)
-0.08 (0.05)
LBDt 0.12
(1.17) 0.14
(1.03) Note: LYt = ln Yt, LYFt = ln YFt, etc.; figures in parentheses are the absolute value of the t-statistics.
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Figure 1(a). India’s Budget Deficit and Trade Balance relative to GDP, 1980-2009 %
Note: The trend is computed using the Hodrick-Prescott filter (HPF)
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Figure 1(b). India’s Budget Deficit and Trade Balance relative to GDP, 1980-2009: Detrended from HPF
%
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Figure 2. Stability of Model based on SBC
Panel A: Monthly Data (January, 1998 – September, 2009)
Panel A: Monthly Data (January, 1998 – September, 2009)
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1998M4 2001M1 2003M10 2006M7 2009M3
The straight lines represent critical bounds at 5% significance level
Plot of Cumulative Sum of Squares of Recursive Residuals
-40 -30 -20 -10
0 10 20 30 40
1998M4 2001M1 2003M10 2006M7 2009M3 The straight lines represent critical bounds at 5% significance level
Plot of Cumulative Sum of Recursive Residuals
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Panel B: Quarterly Data (1998Q1-2009Q1)
Panel B: Quarterly Data (1998Q1-2009Q1)
Plot of Cumulative Sum of RecursiveResiduals
The straight lines represent critical bounds at 5% significance level
-5-10-15-20
05
101520
1999Q1 2001Q3 2004Q1 2006Q3 2009Q12009Q1
Plot of Cumulative Sum of Squaresof Recursive Residuals
The straight lines represent critical bounds at 5% significance level
-0.5
0.0
0.5
1.0
1.5
1999Q1 2001Q3 2004Q1 2006Q3 2009Q12009Q1
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Figure 3. Stability of Model based on AIC
Panel A: Monthly Data (January, 1998 - September, 2009)
Panel A: Monthly Data (January, 1998 - September, 2009)
-20
-10
0
10
20
1999M7 2001M12 2004M5 2006M10 2009M3
The straight lines represent critical bounds at 5% significance level
Plot of Cumulative Sum of Recursive Residuals
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1999M7 2001M12 2004M5 2006M10 2009M3
The straight lines represent critical bounds at 5% significance level
Plot of Cumulative Sum of Squares of Recursive Residuals
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Panel B: Quarterly Data (1998Q1-2009Q1)
Panel B: Quarterly Data (1998Q1-2009Q1)
Plot of Cumulative Sum of RecursiveResiduals
The straight lines represent critical bounds at 5% significance level
-5-10-15
05
1015
1999Q1 2001Q3 2004Q1 2006Q3 2009Q12009Q1
Plot of Cumulative Sum of Squaresof Recursive Residuals
The straight lines represent critical bounds at 5% significance level
-0.5
0.0
0.5
1.0
1.5
1999Q1 2001Q3 2004Q1 2006Q3 2009Q12009Q1
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End Notes
1 Given the staggering deficits of the provincial governments, it amounts to a consolidated budget deficits of about
13% of India’s GDP.
2 As would be expected, there are also evidence in favor of the reverse causality flowing from trade deficit to budget
deficit (Islam, 1998; Anuruo and Ramchander , 1997, 1998; Khalid and Teo, 1999), as well as a bidirectional
causality (Arize and Maliendretos, 2008).
3 The Keynes-Ramsey rule states that in an efficient dynamic setting consumption would grow at a rate equal to the
difference between the real interest rate and the rate of time preference. In the absence of full capital account
convertibility, the risk-adjusted return on capital at home is likely to be lower than in rest of the world (ROW). This
will induce households to save more and postpone consumption (more than in ROW). Lower domestic interest rates
would lower the likelihood of currency appreciation, and the associated deterioration in current account. Thus
budget deficit likely will have no impact on trade deficit (i.e., stronger support for REH). However, we may still see
the impact based on the Keynesian absorption approach.
4 This allows interpretation of the slope coefficients as elasticitities.
5 This is the famous Marshall-Lerner condition. Also presence of trade barriers would further weaken the income
effects.
6 Also known as the auto-regressive distributed lag (ARDL) approach to cointegration and error-correction
modeling. 7 The coefficients of other variables, available on request, are dropped for brevity’s sake.
8 Since no lagged values of ∆ ln BDt-i was chosen by AIC (i.e., i=0), Panel B (Table 2) includes only ∆ ln BDt.