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The Temporal Causality Between Fiscal Deficits And Interest Rates

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  • STEPHEN M. MILLER
  • FRANK S. RUSSEK

Abstract

Conventional wisdom suggests that higher government fiscal deficits cause higher (long-term) interest rates. Much empirical work-generally standard ordinary least squares (OLS) regression analysis-has examined this issue and has produced mixed findings. Even if these standard OLS studies conclude that deficits and interest rates are related, they do not answer the question of which came first-the higher deficit or the higher interest rate? A few studies have used Granger causality to consider the question of temporal causality, generally with short-term interest rates. Tliis paper employs the relatively new cointegration and error-correction methodology to reexamine the temporal causality between fiscal deficits and interest rates-both long term and short term. This study finds evidence that federal deficits cause the long-term interest rate. Copyright 1991 Western Economic Association International.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

Volume (Year): 9 (1991)
Issue (Month): 3 (07)
Pages: 12-23

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Handle: RePEc:bla:coecpo:v:9:y:1991:i:3:p:12-23

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Cited by:
  1. Ardagna, Silvia & Lane, Timothy & Caselli, Francesco, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," Scholarly Articles 2579739, Harvard University Department of Economics.
  2. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
  3. Ardagna, Silvia, 2009. "Financial Markets’ Behavior Around Episodes of Large Changes in the Fiscal Stance," Scholarly Articles 2579824, Harvard University Department of Economics.
  4. Yu Hsing, 2010. "Does More Government Deficit Lead to a Higher Long-term Interest Rate? Application of an Extended Loanable Funds Model to Estonia," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(28), pages 650-659, June.

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