The Deficit?Interest Rate Connection: an empirical assessment of the EU
AbstractThe progressive deterioration of public finances in most developed countries, during the last two decades, prompted an extensive discussion on the effects of government deficits on the interest rate and, consequently, on employment and economic growth. The empirical literature, largely focused on the US, is far from conclusive. This paper examines this relationship in six core EU countries using non-causality tests, including the recently proposed LA-VAR test. The evidence suggests that, contrary to the conventional economic theory, no causal effect from the deficits to the interest rate can in general be found. On the contrary, the econometric tests highlight the preponderant negative consequences of high interest rates on the government total deficit.
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Bibliographic InfoPaper provided by University of Évora, Department of Economics (Portugal) in its series Economics Working Papers with number 5_2004.
Length: 24 pages
Date of creation: 2004
Date of revision:
deficits; interest rates; causality; LA-VAR test; European Union;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-01 (All new papers)
- NEP-MAC-2005-02-01 (Macroeconomics)
- NEP-PBE-2005-02-01 (Public Economics)
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