Revisiting the Twin Deficits Hypothesis: A Quantile Cointegration Analysis over the Period of 1791-2013

Nikolaos Antonakakis, Juncal Cuñado (jcunado@unav.es), Rangan Gupta and Mawuli Segnon (segnon@uni-muenster.de)
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Mawuli Segnon: University of Münster, Center of Quantitative Economics, Germany

No 201607, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper revisits the twin deficits hypothesis by examining the long-run cointegrating relationship between the US budget and trade deficits across various quantiles using a unique dataset for the period 1791-2013. The main results point out to the existence of nonlinearities and structural breaks in the relationship between the US trade and budget deficits, suggesting that the long-run relationship between the two variables has not been constant overtime. Furthermore, we find evidence in favour of the twin deficits hypothesis. Finally, and more importantly, the results suggest that the cointegrating coefficient in the long-run relationship between the two variables is not constant across the different quantiles. In fact, we find that an increase in the budget deficit will have a greater effect on the trade deficit at quantiles below the median than at higher quantiles, suggesting thus, that private agents react in a “Keynesian manner” when budget deficits are below the median, while they react in a “Ricardian manner” when deficits are above the median.

Keywords: twin deficits hypothesis; structural breaks; non-linearities; quantile ARDL model (search for similar items in EconPapers)
JEL-codes: C22 E62 F32 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2016-02
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Journal Article: Revisiting the twin deficits hypothesis: a quantile cointegration analysis over the period 1791-2013 (2019)
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