Twin Deficits An empirical analysis on the relationship between budget deficits and trade deficits in Argentina

The majority of existing literature on the twin deficits hypothesis focuses on its effects in economies already well developed. The theory suggests that there is a causal relationship between the budget deficit and trade deficit of a nation, a claim often debated in the economic community. This paper attempts to supplement existing literature by examining the causal relationship between budget deficit and trade deficit for a nation whose economy is earlier on the developmental timeline. Using data for Argentina from 1976:Q1 through 2010:Q3, the relationship is investigated in the framework of Granger’s test for causality.