The Budget Deficit and the Trade Deficit: Insights into This Relationship

This paper addresses the issue of concomitant high budget and trade deficits in the United States. Is it just a coincidence or is there any systematic relationship? The paper employs a bi-error criterion with quarterly data for the U.S. to determine whether a causal relationship exists between trade deficit and budget deficit. The empirical analysis indicate that the trade and budget deficit are related and also finds support for the conventional prpoposition that high budget deficits have caused high trade deficits. However, results do not suggest any feed back from trade to budget deficit. Consequently, budget deficit plays an important role in the budget-trade relationship.