Does Fiscal Deficit Affect Current Account Deficit in India? An Econometric Analysis

2017 ◽  
Vol 9 (3) ◽  
pp. 155-174
Author(s):  
Umer J. Banday ◽  
Ranjan Aneja
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Current Account ◽  
Current Account Deficit ◽  
Exchange Rate Volatility ◽  
Empirical Literature ◽  
Chain Model ◽  
Causality Test ◽  
Long Run ◽  
Deficit Financing

The aim of this article is to examine the validity of the Keynesian proposition and Ricardian equivalence (RE) theorem for the developing country India over the period 1990–2015. The Mundell–Fleming model and Feldstein chain model which revolve around the Keynesian proposition argues it is budget deficit (BD) which influences current account deficit (CAD), with the increase in interest rate. While as RE theorem states that there is no relationship between BD and CAD, the decrease in tax rates will not increase the consumption because rational agents consider today’s deficit financing as tomorrow’s liabilities. The article initially investigates the theoretical foundation, followed by empirical literature, and uses various methods of econometrics to testify its validity. A co-integration and vector error correction model (VECM) model validates the existence of long-run relationship. The results of Granger causality test reveal the existence of bi-directional causality between BD and CAD and validates Keynesian proposition in India. Our results conclude that instability in macro variables such as inflation, exchange rate, interest rate and money supply (MS) causes CAD and BD which further have been proved by Cholesky decomposition method. However, it has been said in the global economic world that no one can escape the windfall effect of exchange rate volatility and rising prices, and such effects can be minimised but not eliminated. JEL: E12, E31, E52, E62, E63, E41

scholarly journals Reverse Causality between Fiscal and Current Account Deficits in ASEAN: Evidence from Panel Econometric Analysis

Mathematics ◽  
2021 ◽  
Vol 9 (10) ◽  
pp. 1124
Author(s):  
Maran Marimuthu ◽  
Hanana Khan ◽  
Romana Bangash
Keyword(s):  
Interest Rate ◽  
Least Squares ◽  
Current Account ◽  
Current Account Deficit ◽  
Ordinary Least Squares ◽  
Reverse Causality ◽  
Causality Test ◽  
Distributed Lag ◽  
Long Run ◽  
Short Run

This study aims to explore the causal relationship between fiscal deficit (FD) and current account deficit (CAD) along with policy recommendations based on long-run and short-run dynamics and sensitivities. A panel data span from 1990 to 2019 is analyzed based on panel unit root tests, panel co-integration with auto-regressive distributed lag (ARDL), panel co-integration regression with fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS), and causal analysis with the Dumitrescu and Hurlin (DH) technique. The results disclosed that all tested variables are stationary at the first difference I(1) except the real interest rate (IR), which is stationary at level I(0). The ARDL estimates suggested that there is a long-run relationship between tested variables and 92% annual convergence is possible for long-run equilibrium. The FMOLS and DOLS estimates indicated that the CAD is sensitive towards the FD and the exchange rate. The DH causality test showed that the CAD is significantly affecting the FD, supporting the current account targeting hypothesis. Furthermore, it is observed that the interest rate is acting as a moderating factor between the FD and the CAD because it causes both the deficits. Thus, reverse causality is concluded from the CAD to the FD. These results have macroeconomic implications for fiscal policy in the Association of South-East Asian Nations (ASEAN-10).

scholarly journals Dynamic Relationship between RMB Exchange Rate and Interest Rate Based on VAR-DCC-GARCH Model

2020 ◽  
Vol 214 ◽  
pp. 03018
Author(s):  
Xuhang Zhao
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Exchange Rate Volatility ◽  
Garch Model ◽  
Nominal Exchange Rate ◽  
Practical Significance ◽  
Causality Test ◽  
Dynamic Relationship ◽  
Interest Rate Volatility

Based on the daily data of Shibor and nominal exchange rate from 2006 to 2019, this paper constructs VAR model and uses Granger causality test and impulse response model to analyze the dynamic relationship between exchange rate and interest rate. Based on the DCC-GARCH model, this paper analyzes the correlation between exchange rate volatility and interest rate volatility, and concludes that there is a weak negative correlation between exchange rate and interest rate. Both exchange rate and monetary policy will have an important impact on China’s economic environment, so it is of great practical significance to study the joint impact of exchange rate and monetary policy.

Re-examining the twin deficit hypothesis for major South Asian economies

2019 ◽  
Vol 12 (3) ◽  
pp. 265-287
Author(s):  
Shruti Shastri
Keyword(s):  
Time Series ◽  
Exchange Rate ◽  
Interest Rate ◽  
Sri Lanka ◽  
South Asian ◽  
Current Account ◽  
Transmission Mechanism ◽  
Asian Countries ◽  
Content Type ◽  
Long Run

Purpose The purpose of this study is to revisit the twin deficit hypothesis (TDH) and provide insights into the transmission mechanism connecting budget deficits and current account deficits for five major South Asian countries, namely, India, Bangladesh, Pakistan Sri Lanka and Nepal for the period 1985-2016. Design/methodology/approach This study uses a multivariate framework including real interest rate, real exchange rate and real gross domestic product to avoid the possibility of incorrect inferences caused by omission of relevant mediating variables. The long-run relationship and causality are investigated through the autoregressive distributed lag bounds testing approach and Toda Yamamoto approach, respectively, for each individual country. The robustness of the results is assessed with the help of Westerlund’s cointegration test and group mean fully modified ordinary least squares (GM-FMOLS), group mean dynamic ordinary least square (GM-DOLS) and common correlated effect mean group (CCEMG) estimators in the panel framework. Findings Both time series and panel evidences indicate long-run relationship between budget balance (BB) and current account balance (CAB) together with the mediating variables. The results indicate bi-directional causation between the two balances for India and Bangladesh, TDH for Pakistan and Sri Lanka and the reverse causation from CAB to BB for Nepal. Regarding the transmission mechanism, the results indicate the absence of the causal chain postulated by Mundell–Fleming, which predicts that BB causes CAB via interest rate and exchange rate. A CCEMG estimate of the import demand function reveals a positive government spending elasticity of imports suggesting that BB affects CAB by direct impact through demand. Originality/value This study augments the twin deficit literature on South Asian countries by providing insights into the transmission mechanism connecting the BB and CAB. Moreover, the study provides robust evidences on the TDH by using both time series and panel data techniques.

scholarly journals An Econometrics Analysis of the Impact Exchange Rate on Economic Growth of Nigeria

2021 ◽  
Vol 4 (3) ◽  
pp. 185-198
Author(s):  
Okosu Napoleon David
Keyword(s):  
Economic Growth ◽  
Exchange Rate ◽  
Interest Rate ◽  
Money Supply ◽  
Current Account ◽  
Series Data ◽  
Current Account Balance ◽  
National Account ◽  
Long Run ◽  
The Impact

The study interrogates the impact of exchange rate on the economic growth of Nigeria from 1981 to 2020 using quarterly time-series data from the Central Bank of Nigeria and the World Bank National Account. The dependent variable in the model was Real Gross Domestic Product (RGDP), and the independent variables were Exchange Rate (EXCHR), inflation (INFL), Interest Rate (INTR), Foreign Direct Investment (FDI), Broad Money Supply (M2) and Current Account Balance of Payment (CAB). The methodology employed was the Auto-Regressive Distributed Lag (ARDL) model which incorporates the Cointegration Bond test and Error-Correction Mechanism. The finding indicates that in the short run, EXCHR, CAB, M2 and FDI, had a positive impact on economic growth. The impact of EXCHR and CAB were significant on growth while that of M2 and FDI were insignificant to growth. However, INTR and INFL had a negative impact on economic growth with both variables being statistically significant. The bound test showed that there was a long-run relationship among the study variables, and the results from the long run reveal that the exchange rate has a positive and significant impact on economic growth. Inflation, Interest rate, FDI, Current Account Balance of Payment (CAB) and Broad Money Supply all have a positive and significant impact on economic growth. Based on the findings the study recommended that monetary authority should strictly monitor the operations of banks and other forex dealers with a view of ensuring unethical practices are adequately sanctioned to serve as a deterrent to others.

scholarly journals ANALISIS KEBIJAKAN MONETER DALAM MENGENDALIKAN INFLASI DI INDONESIA

2012 ◽  
Vol 1 (2) ◽  
pp. 103
Author(s):  
Suriani Suriani
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Interest Rates ◽  
Granger Causality ◽  
Unit Root Test ◽  
Good Choice ◽  
Causality Test ◽  
Long Run ◽  
Short Run

The objective of this research is to analize the effects of the variables interest rate, and exchange as one of monetary mecanisme for controlling inflation. The correlation among those variables is cointgration in the long run and short run equilibrium analyzed. In Indonesia, the monetary policy is run by monetary instruments (i.e. interest rates or monetary aggregates) to achieve price stability. This research used Unit Root Test , Cointegration Test, Granger causality and VECM (Vector Error Correction Model) Test. The results of estimation showed that have cointegration among interest rate, exchange rate and inflation in the long run. Granger causality test showed that between inflation and interest rate have no causality relationship, but for inflation and exchange rate have two directions relationship of causality. It’s means, monetary of mecanisme transmition through exchange rate channel can be good choice in making monetary policy to control inflation in Indonesia.

Exploring the Relationships among Interest Rate, Exchange Rate, and Stock Market in Indonesia

2016 ◽  
Vol 4 (3) ◽  
pp. 37-43
Author(s):  
Sherlinda Octa Yuniarsa ◽  
Jui-Chuan Della Chang
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Stock Market ◽  
Stock Price ◽  
Structural Breaks ◽  
Emerging Market ◽  
Exchange Rate Volatility ◽  
Market Volatility ◽  
Empirical Literature ◽  
Stock Market Volatility

Objective - The purpose of this research is to explore the relationships among interest rate, exchange rate, and stock price in Indonesia. Methodology/Technique - This study used data from the Central Bank of Indonesia to empirically test a proposed model of interest rate, exchange rate, and stock price. Findings - The findings confirmed that there are positive volatilities from exchange rate and negative volatility from interest rate. The relationships among interest rate, exchange rate, and stock market excessive volatility a little bit strengthen during economic crises, a study that allows for structural breaks, to account for the effects of sudden macroeconomic shocks, recessions, and financial crises, would be important to empirical literature on Indonesia. Novelty - This study proved that it is important to point out the variance decomposition results also showed that except for volatility in the exchange rate, interest rate, and stock market volatility also seems to explain quite a high proportion of the some variations of the macroeconomic excessive volatility. Type of Paper - Conceptual Keywords: interest rate volatility, exchange rate volatility, stock market volatility, emerging market, Asymmetric ARCH models

scholarly journals LONG RUN RELATIONSHIP BETWEEN OIL PRICE SHOCKS, EXCHANGE RATE VOLATILITY AND ECONOMIC GROWTH IN NIGERIA

2021 ◽  
Vol 4 (2) ◽  
pp. 27-51
Author(s):  
Abubakar Mikailu Aminu ◽  
◽  
Alexander Abraham Anfofum ◽  
Zakaree Saheed ◽  
◽  
...  
Keyword(s):  
Economic Growth ◽  
Exchange Rate ◽  
Positive Impact ◽  
Exchange Rate Volatility ◽  
Oil Price ◽  
Causality Test ◽  
Long Run ◽  
Oil Price Shock ◽  
Price Shock ◽  
Short Run

The paper examined the long run relationship between oil price shock, exchange rate volatility and economic growth in Nigeria over the period 1980-2019. The study employed the Johansen Vector Autoregression (VAR)-based cointegration technique model to examine the sensitivity of real economic growth to changes in oil prices and real exchange rate volatility in the long-run while the short run dynamics was checked using a vector error correction model. The result from the Granger causality test suggests that there is causality between oil price, exchange rate and GDP. The results from Johansen cointegration test indicate there exist a long-run equilibrium relationship among the variables. Findings further show that oil price shock and appreciation in the level of exchange rate exert positive impact on real economic growth in Nigeria. The paper therefore recommends greater diversification of the economy through investment in key productive sectors of the economy using income from the crude oil export to guard against the vicissitude of oil price shock and exchange rate volatility.

scholarly journals OIL PRICE AND EXCHANGE RATE VOLATILITY IN NIGERIA

2021 ◽  
Vol 6 (1) ◽  
pp. 74-86
Author(s):  
Lawson E. Igbinovia ◽  
Omorose A. Ogiemudia
Keyword(s):  
Exchange Rate ◽  
Significant Influence ◽  
Exchange Rate Volatility ◽  
Preliminary Test ◽  
Oil Price ◽  
Equation Modeling ◽  
Framework Analysis ◽  
Causality Test ◽  
Dynamic Framework ◽  
Long Run

This study examined oil price influence on the Nigeria exchange rate volatility spanning the retro of thirty five (35) years. The Simultaneous equation modeling of Granger causality test and Vector Error Correction Model (VECM) techniques were adopted, to analyzed the data stream from 1983 – 2019. A dynamic framework analysis that includes test of unit root, descriptive statistics and co-integration preliminary test were carried out. Specifically, the empirical findings show that the coefficient of oil price and other variables (rate of interest, inflation rate and external reserve) considered has varying degree of significant relationship with volatility of exchange rate in Nigeria both in the succinct and long run during the retro under review. The study concludes that oil price has a long run positive non-significant influence on exchange rate volatility and a short run negative non-significant influence on exchange rate volatility in Nigeria during the sample retro under concern.

scholarly journals External Debt Burden and Infrastructural Development Nexus in Nigeria: An ARDL Approach (1981-2020)

2021 ◽  
Author(s):  
Chinonye Emmanuel Onwuka
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Inflation Rate ◽  
External Debt ◽  
Granger Causality Test ◽  
Causality Test ◽  
Debt Burden ◽  
Infrastructural Development ◽  
Long Run ◽  
Domestic Debt

Abstract This study focused on external debt burden and infrastructural development nexus in Nigeria using data spanning between the periods 1981 to 2020 by employing the use of Autoregressive Distributed Lag Model (ARDL) and granger causality test as the major statistical techniques of analysis. From the findings, the coefficient of error correction term shows that about 70 percent of the discrepancy between the actual and the long run or equilibrium value of infrastructural development is corrected or eliminated each year. The coefficient of determination (R2) is 0.680 which shows that about 68 percent variations in the infrastructural development were explained by the independent variables. The Augmented Dickey Fuller (ADF) unit root test shows that all variables were stationary at first difference. The results for the Bounds test reveal that there is a long run relationship among the variables. This is because the F-statistics value (5.194) is greater than upper Bounds critical values at 5% level of significant. The ARDL results show that external debt, domestic debt and inflation rate have a negative impact on infrastructural development in the long run while exchange rate and interest rate has a positive effect on infrastructural development in the long run. Also, domestic debt and exchange rate were found to have a significant impact on infrastructural development while external debt, inflation rate and interest rate were found to be insignificant in the long run. Furthermore, the granger causality test results indicate while there is no causality between external debt and infrastructural development, there seems to be a unidirectional causality between domestic debt and infrastructural growth in Nigeria. The study concludes that federal government of the country should cut down excessive borrowings and that the existing ones are invested in projects that would eventually generate enough returns to defray such debts accordingly. Also, an adoption of policy framework that will ensure macroeconomic stability such as price stability, job creation, increased output, political stability, etc. becomes fundamental in getting rid of heavy reliance on external debt in the country.

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