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The Effect of oil shocks and cyclicality in hiding Indian twin deficits

Ashima Goyal and Abhishek Kumar ()
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Abhishek Kumar: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: The paper estimates the relationship between the current account and fiscal deficit, and the real exchange rate, in a structural vector autoregression, with Indian data for the managed float period 1996Q2 to 2015 Q4, after controlling for output growth and oil shocks. It also examines the cyclicality of the current account, the size of each shock, and assesses whether aggregate demand, forward-looking smoothing, or supply shocks dominate outcomes. The current account deficit (CAD) is found to be countercyclical. A fiscal deficit shock raises the CAD, but high impact growth shocks and large variance oil shocks lead to overall divergence of the deficits. There is some support for the aggregate demand channel, but it is moderated by supply shocks and compositional effects. Consumption is sticky rather than forward-looking.

Keywords: Twin deficits; real exchange rate; growth; oil shocks; SVAR; cyclicality (search for similar items in EconPapers)
JEL-codes: H62 F32 D91 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene
Date: 2017-05
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Related works:
Journal Article: The effect of oil shocks and cyclicality in hiding Indian twin deficits (2018) Downloads
Working Paper: The Effect of Oil Shocks and Cyclicality in Hiding Indian Twin Deficits (2017) Downloads
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