Budget Deficits and Other Macroeconomic Variables in India

Abstract

This paper tries to study the interaction of budget deficit of India with other macroeconomic variables such as Nominal effective exchange rate, GDP, Consumer Price Index and money supply (M3) giving special emphasis on the budget deficit-exchange rate relationship using Cointegration approach and Variance Error Correction Models (VECM) for the period 1970-2002. The results reveal that the variables under study are cointegrated and there is a bi-directional causality between budget deficit and nominal effective exchange rates. However, we have not observed any significant relationship between budget deficit and GDP, Money supply & consumer price index. It is also observed that the GDP Granger-causes budget deficit where as budget deficit does not.