Indian Twin Deficits: The Role of Inflation and Money Supply

Authors

  •   Madhura Bedarkar Assistant Professor, Symbiosis Institute of Business Management, Pune, Symbiosis International University, Lavale Gram, Mulshi Taluka, Pune - 412 215
  •   Santosh Gopalkrishnan Assistant Professor, Symbiosis Institute of Business Management, Pune, Symbiosis International University, Lavale Gram, Mulshi Taluka, Pune - 412 215
  •   Kunal Khairnar Doctoral Student, Ecole d'économie de Toulouse, Manufacture des Tabacs, 21, Allée de Brienne 31015 Toulouse Cedex 6

DOI:

https://doi.org/10.17010/ijf/2016/v10i2/87231

Keywords:

Twin Deficits Hypothesis

, Mundell-Fleming Model, Inflation, IS-LM Model, Johansen Cointegration, Fiscal Deficit, Current Account Deficit.

E6

, H2, H5, H6

Paper Submission Date

, August 5, 2015, Paper sent back for Revision, November 17, Paper Acceptance Date, January 4, 2016.

Abstract

The study explored the role of inflation and money supply in the twin deficits hypothesis using the IS-LM framework and posited that inflation could be the mediating variable which explains why a higher fiscal deficit may lead to worsening of the current account balance. This may hamper the effectiveness of the monetary policy and long run output growth. We tested the model empirically on Indian data using Johansen's cointegration test to find evidence that fiscal deficit, current account deficit, inflation, and money supply have a long-run relationship.

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Published

2016-02-01

How to Cite

Bedarkar, M., Gopalkrishnan, S., & Khairnar, K. (2016). Indian Twin Deficits: The Role of Inflation and Money Supply. Indian Journal of Finance, 10(2), 7–23. https://doi.org/10.17010/ijf/2016/v10i2/87231

Issue

Volume 10, Issue 2, February 2016

Section

Articles
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