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Government Debt, Interest Rates And International Capital Flows: Evidence From Cointegration

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  • Pene Kalulumia

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    (Département d'économique, Université de Sherbrooke)

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    Abstract

    This paper examines the impact of government debt on interest rates in the United States, Germany, the United Kingdom and Canada. It builds on the general portfolio balance framework which allows for both direct and indirect tests of the link between public debt and interest rates, and uses the Johansen-Juselius multivariate cointegration techniques to perform these tests. Indirect tests in this model consist of investigating the debt impact on interest rates through the effects of debt on the exchange rate and money demand. The evidence indicates that both transitory and permanent changes in the level of government debt cause higher domestic interest rates and money demand and appreciate the exchange rate in all four countries under study.

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    File URL: http://gredi.recherche.usherbrooke.ca/wpapers/00_03.pdf
    File Function: First version, 2000
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    Bibliographic Info

    Paper provided by Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke in its series Cahiers de recherche with number 00-03.

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    Length: 26 pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:shr:wpaper:00-03

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    Postal: Sherbrooke, Québec, J1K 2R1
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    Web page: http://www.gredi.org/home/documents-de-travail
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    1. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    2. Cushman, David O. & Sang Sub Lee & Thorgeirsson, Thorsteinn, 1996. "Maximum likelihood estimation of cointegration in exchange rate models for seven inflationary OECD countries," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 337-368, June.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    5. Bahmani-Oskooee, Mohsen & Payesteh, Sayeed, 1994. "Do budget deficits cause capital inflows? Evidence from the United States," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(1), pages 63-74.
    6. Cebula, Richard J. & Koch, James V., 1994. "Federal budget deficits, interest rates, and international capital flows: A further note," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(1), pages 117-120.
    7. Hyllerberg, S. & Engle, R.F. & Granger, C.W.J. & Yoo, B.S., 1988. "Seasonal Integration And Cointegration," Papers 0-88-2, Pennsylvania State - Department of Economics.
    8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    10. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    11. Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 281-300, September.
    12. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
    13. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    14. Deravi, M Keivan & Hegji, Charles E & Moberly, H Dean, 1990. "Government Debt and the Demand for Money: An Extreme Bound Analysis," Economic Inquiry, Western Economic Association International, vol. 28(2), pages 390-401, April.
    15. Bilodeau, Marc & Slivinski, Al, 1996. "Volunteering nonprofit entrepreneurial services," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 117-127, October.
    16. Miller, Stephen M, 1991. "Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 139-54, May.
    17. Seater, John J., 1985. "Does government debt matter? A review," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 121-131, July.
    18. repec:ebl:ecbull:v:10:y:2003:i:2:p:1-9 is not listed on IDEAS
    19. Paul Makdissi & Quentin Wodon, 2001. "Migration, Poverty, and Housing: Welfare Comparisons Using Sequential Stochastic Dominance," Cahiers de recherche 01-01, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke, revised 2002.
    20. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
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