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

Author

Listed:
  • Nikolaos Antonakakis

    (Department of Economics and Finance, University of Portsmouth; Department of Business and Management, Webster Vienna Private University)

  • Juncal Cunado

    (University of Navarra, School of Economics, Spain)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Mawuli K. Segnon

    (University of Münster, Center of Quantitative Economics, Germany)

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.

Suggested Citation

  • Nikolaos Antonakakis & Juncal Cunado & Rangan Gupta & Mawuli K. Segnon, 2016. "Revisiting the Twin Deficits Hypothesis: A Quantile Cointegration Analysis over the Period of 1791-2013," Working Papers 201607, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201607
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    Cited by:

    1. Murshed, Muntasir & Nijhum, Nawrin Khan, 2019. "The Fiscal and Current Account Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh," MPRA Paper 97115, University Library of Munich, Germany.

    More about this item

    Keywords

    twin deficits hypothesis; structural breaks; non-linearities; quantile ARDL model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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