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Twin Deficits Phenomenon in Maldives: Spectral and Time Domain Analysis of Time Series

Kanchan Datta and Chandan Kumar Mukhopadhyay

The IUP Journal of Applied Economics, 2010, vol. IX, issue 2, pages 98-125

Abstract: There has been a plethora of studies concerning the relationship between budget deficit and trade deficit. The overall findings can be classified under two broad hypotheses. One is known as the  twin deficit hypothesis , which implies that there does exist a relationship between budget deficit and trade deficit and budget deficit Granger causes trade deficit. On the other hand, there is an alternative hypothesis known as  Ricardian equivalence theorem , which negates any such relation. This study seeks to test these hypotheses and examine the nature as well as the direction of causal relation between budget deficit and trade deficit in the economy of Maldives, by using real budget deficit and trade deficit data series. This study is based on a battery of tests, such as ADF and PP unit root tests and correlogram, followed by the estimation of cointegration, VECM, Granger causality through VAR model and spectral analysis. The findings of the study support the Ricardian equivalence hypothesis for the economy of Maldives over the period of the study.

Date: 2010
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