Twin Deficits or Distant Cousins? Evidence from India

The twin-deficits theory has intrigued economists and policy-makers alike for the past few decades. In a Keynesian economy, budget deficit increases the absorption of the economy, causes import expansions, and thereby, worsens the trade deficit. It also causes domestic interest rates to rise, domestic currency to appreciate, and thereby, contributes to trade deficits. However, according to the Ricardian Equivalence Hypothesis (REH), rising budget deficits implies higher future tax-liabilities so people would save more and consume less. As a result, an inter-temporal shift between taxes and budget deficits would have no impact on the real interest, or the trade deficit. Thus, the issue of whether the twin-deficits phenomenon holds becomes more of an empirical question, and the recent fiscal expansions to curb recession makes it timely to revisit the phenomenon, especially for the developing countries confronting both the deficits on a chronic basis. To this end, we make a case study of India, using the bounds-testing approach to cointegration and error-correction modeling on monthly and quarterly data over 1998-2009. Our results suggest that the twin-deficits theory holds for India in the short-run (validating the Keynesian channel) but not in the long run (validating the REH)

Cointegration and Causality between Tourism and Poverty Reduction

This study, using cointegration and causality tests, investigates the relationship among tourism development, economic expansion, and poverty reduction in Nicaragua. The results indicate a long-run stable relationship among the three. The causality tests suggest a one-way Granger causal relation between tourism development and economic expansion, and between tourism and poverty reduction, and a bidirectional causal relation between economic expansion and poverty. The nexus of tourism, economic expansion, and poverty reduction is established in the Nicaraguan economy. This result is supported by testing the sensitivity of the Granger causality test under different lag selections along the optimal lag. The empirical evidence points to the potential economic muscle of tourism to seriously tackle Nicaraguan poverty at scale through helping both Nicaragua\u27s public and private sectors allocate resources to tourism development, resulting in the overall improvement of the economy