Temporal Causality between Budget Deficit and Interest Rate: The Case of South Africa
AbstractThis paper investigates the direction of temporal causality between budget deficit and interest rate in South Africa using quarterly data for the period of 1961:02 to 2005:04, and also for annual data covering 1961 to 2005. Based on a multivariate Vector Error Correction Model (VECM), estimated using Johansen’s (1991, 1995) Maximum Likelihood Approach, we find that budget deficit Granger causes interest rate in the quarterly data. However, for the annual data, no causal relationship could be detected between the budget deficit and the Treasury bill rate. The two variables of interest are, however, positively cointegrated for both data frequency. Interestingly though, exactly the same results were obtained from the simple Granger causality tests based on a bivariate framework, comprising merely of budget deficit and interest rate.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200708.
Length: 24 pages
Date of creation: Jun 2007
Date of revision:
Cointegration Test; Granger Causality Test; Vector Autoregressive Model; Vector Error Correction Model;
Find related papers by JEL classification:
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
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