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Linear and Non-Linear Granger Causality Between Short-Term and Long-Term Interest Rates: A Rolling Window Strategy

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  • Azadeh Rahimi
  • Ba M. Chu
  • Marc Lavoie

Abstract

In this paper, a rolling window strategy is employed to detect the linear and nonlinear Granger causality relationships between the U.S. federal funds rate and the 10-year government bond rate, during different time horizons, investigating whether these causalities change with the passing of time. For linear Granger causality tests, we apply the Toda-Yamamoto (1995) approach and for nonlinear ones we use a nonlinear Granger causality test introduced by Diks and Panchenko (2006). Our findings show that during nearly all time periods there is a significant two-way Granger causality relationship between these two interest rates.
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Suggested Citation

  • Azadeh Rahimi & Ba M. Chu & Marc Lavoie, 2017. "Linear and Non-Linear Granger Causality Between Short-Term and Long-Term Interest Rates: A Rolling Window Strategy," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 882-902, November.
    • Handle: RePEc:bla:metroe:v:68:y:2017:i:4:p:882-902
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    File URL: http://hdl.handle.net/10.1111/meca.12148
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    1. Robert Pollin, 1991. "Two Theories of Money Supply Endogeneity: Some Empirical Evidence," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 13(3), pages 366-396, March.
    2. Diks Cees & Panchenko Valentyn, 2005. "A Note on the Hiemstra-Jones Test for Granger Non-causality," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(2), pages 1-9, June.
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    7. Diks, Cees & Panchenko, Valentyn, 2006. "A new statistic and practical guidelines for nonparametric Granger causality testing," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1647-1669.
    8. Marc Lavoie, 2005. "Monetary base endogeneity and the new procedures of the asset-based Canadian and American monetary systems," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(4), pages 689-709.
    9. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    10. Hiemstra Craig & Kramer Charles, 1997. "Nonlinearity and Endogeneity in Macro-Asset Pricing," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(3), pages 1-18, October.
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    1. Rahimi , Azadeh, 2019. "The Endogenous or Exogenous Nature of Money Supply: Case of Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(1), pages 27-40, January.
    2. Matteo Deleidi & Enrico Sergio Levrero, 2021. "Monetary policy and long‐term interest rates: Evidence from the U.S. economy," Metroeconomica, Wiley Blackwell, vol. 72(1), pages 121-147, February.
    3. Levrero, Enrico Sergio & Deleidi, Matteo, 2019. "The causal relationship between short- and long-term interest rates: an empirical assessment of the United States," MPRA Paper 93608, University Library of Munich, Germany.
    4. Tanweer Akram, 2021. "Multifactor Keynesian Models of the Long-Term Interest Rate," Economics Working Paper Archive wp_991, Levy Economics Institute.
    5. Li, Shuping & Lu, Xinsheng & Li, Jianfeng, 2021. "Cross-correlations between the P2P interest rate, Shibor and treasury yields," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 574(C).
    6. Huiqing Li & Yang Su, 2021. "The nonlinear causal relationship between short‐ and long‐term interest rates: An empirical assessment of the United States, the United Kingdom, and Japan," International Finance, Wiley Blackwell, vol. 24(3), pages 332-355, December.

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