India’s Twin Deficit Hypothesis: An Asymmetric ARDL Perspective

Abstract

This study examines the relationship between fiscal deficit and trade deficit, known as ‘twin deficits hypotheses, in the Indian economy between 1977-2022. This study’s empirical results are derived using the Asymmetric cointegration technique (Nonlinear Autoregressive Distributed Lag model - NARDL) to estimate the long-run and short-run relationship. Zivot and Andrew’s (ZA) unit root test determines structural breaks in the series of the twin deficit variables. The asymmetric NARDL results for the short-run and long-run confirm that the trade deficit hypothesis can decide India’s fiscal deficit. Their relationship is healthier in the long-run.