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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.

Suggested Citation

  • Stephen M. Miller & Frank S. Russek, 1991. "The Temporal Causality Between Fiscal Deficits And Interest Rates," Contemporary Economic Policy, Western Economic Association International, vol. 9(3), pages 12-23, July.
    • Handle: RePEc:bla:coecpo:v:9:y:1991:i:3:p:12-23
    DOI: 10.1111/j.1465-7287.1991.tb00337.x
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    9. Ardagna, Silvia, 2009. "Financial Markets’ Behavior Around Episodes of Large Changes in the Fiscal Stance," Scholarly Articles 2579824, Harvard University Department of Economics.
    10. Eric M. Engen & R. Glenn Hubbard, 2005. "Federal Government Debt and Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 83-160, National Bureau of Economic Research, Inc.
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