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FURTHER ANALYSIS OF THE TWIN DEFICITS
Author(s) -
BISWAS BASUDEB,
TRIBEDY GOPAL,
SAUNDERS PETER
Publication year - 1992
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.1992.tb00217.x
Subject(s) - economics , deficit spending , causation , econometrics , relation (database) , causality (physics) , miller , lag , macroeconomics , computer science , debt , ecology , computer network , physics , quantum mechanics , database , biology , political science , law
In a 1989 Contemporary Policy Issues article Miller and Russek published findings of a causal relation between the fiscal deficit and the trade deficit. However, they found no overwhelming support for reverse causation between the twin deficits. The authors of the analysis here gathered annual data on U.S. federal budget deficits and net exports for 1950–1988 and deflated the nominal values by the GDP deflators to examine the causal relation based on real values. They made a distinction between structural and actual budget deficits. Instead of an arbitrary choice of lag structure, they used Hsiao (1979, 1981) minimum final prediction error criterion to determine the optimum lag lengths of the explanatory variables. The analysis reveals a unidirectional causal relation running from structural budget deficits to net exports, confirming some of Miller and Russek's findings. Contrary to Miller and Russek's conclusions, however, findings here indicate a bi‐directional causal relation between actual budget deficits and net exports. These findings suggest important policy implications.