An Empirical Investigation of Budget and Trade Deficits: The Case of Bangladesh

Authors

  • Asrafuzzaman . Assistant Professor Department of Economics Shahjalal University of Science and Technology.
  • Amit Roy Graduate Student, Department of Economics, Shahjalal University of Science and Technology, Sylhet-3114, Bangladesh
  • Sanat Das Gupta Graduate Student, Department of Economics, Shahjalal University of Science and Technology, Sylhet-3114, Bangladesh

Abstract

This study attempts to investigate the evidence of twin deficits hypothesis, that is, the simultaneous existence of fiscal and foreign trade account deficits in Bangladesh. In this regard this paper examines the causal relationship between budget deficit and trade deficit based on annual time series data from 1972-73 to 2011-12 fiscal year. Applying the VAR and Granger Causality after successfully running ADF and PP unit root test and cointegration rank test this paper reveals that budget deficit Granger cause trade deficit and vice versa but the relationship does not stand for the long-run dynamics. In fact, the long run relationship depends on overall macroeconomic environment and performances of other relevant variables. Policy implication is that Government should reduce budget deficit to improve the trade account balance.

Keywords:  Twin deficits; Bangladesh; Budget deficit; Trade deficit; Granger causality; VAR

JEL Classifications: F11; F32; F41; H62

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Author Biographies

Asrafuzzaman ., Assistant Professor Department of Economics Shahjalal University of Science and Technology.

Assistant ProfessorDepartment of EconomicsShahjalal University of Science and Technology, Sylhet-3114Bangladesh.

Amit Roy, Graduate Student, Department of Economics, Shahjalal University of Science and Technology, Sylhet-3114, Bangladesh

Graduate Student, Department of Economics, Shahjalal University of Science and Technology, Sylhet-3114, Bangladesh

Sanat Das Gupta, Graduate Student, Department of Economics, Shahjalal University of Science and Technology, Sylhet-3114, Bangladesh

Graduate Student, Department of Economics, Shahjalal University of Science and Technology, Sylhet-3114, Bangladesh

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Published

2013-04-10

How to Cite

., A., Roy, A., & Gupta, S. D. (2013). An Empirical Investigation of Budget and Trade Deficits: The Case of Bangladesh. International Journal of Economics and Financial Issues, 3(3), 570–579. Retrieved from https://www.econjournals.com/index.php/ijefi/article/view/282

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