Existence of Twin Deficits in Economics : With Special Reference to the Economy of Maldives

Contents Preface 1 Theoretical aspects of twin deficits 2 An outline of Maldivian economic environment 3 Literature survey 4 Research methodology models and the data 5 Stationarity and integrability of budget deficits and trade deficits 6 Study of cointegration 7 Stability of the long-run relationship between trade deficit and budget deficit in Maldives 8 Causality test 9 Vector auto regression VAR modeling 10 Intervention analysis through the study of impulse response functions 11 Intervention analysis through the study of variance decomposition 12 Summary conclusion and future scope BibliographyThe macroeconomic structure of trading economies and the evolution of the ideas of the economists about is since 1971 constitute fascinating topic of interest to a researcher who seeks to know whether events shape ideas or ideas modify the course of events The period since 1970s in economic history is made colorful by the growth of unprecedented events and subsequent development of important innovative ideas The events which took place in this period are perplexing and enormously important for international economic community The ideas too changed markedly in the past decades The focus of analysis has changed The validity of some of the underlying assumptions of the prevalent models has been questioned Some well known theories have been subject to skepticism New assumptions have been introduced The macroeconomic structures of trading economies have been re-examinedThe most important events in the history of international economics during 1970s is the breakdown of fixed exchange rate system and the adoption of flexible exchange rate system instead It is significant because it spelled the end of the spirit of Bretton Woods System as incorporated in the IMF chapter With the adoption of flexible exchange rate system since 1970s another important event emerged This is known as the Twin deficits Phenomenon in economic literatureThe phenomenon of Twin Deficits is a recent development in macroeconomic structure of trading economies Its origin dates back to 1980s when flexible exchange rate virtually replaced the system of fixed exchange rate The simultaneous upsurge of the budget deficit and trade current account deficit in a relatively large number of countries was observed in 1980s The close correlation observed between these two deficits is usually known as Twin deficitsTwin Deficits therefore refer to the long run relationship between budget deficit and trade deficit or current account deficit The proposition that budget deficit has positive and significant effect on trade deficit is usually referred to as twin deficit hypothesis The hypothesis basically implies that the main cause of trade deficit is the excessive budget deficit However some economists also argue that budget deficit may also be the resultant of trade deficit Consequently the direction of causality between these two macroeconomic variables appears to be a subject of contention among the economists jacket 176 pp.…