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The Deficit?Interest Rate Connection: an empirical assessment of the EU

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  • Carlos Vieira

    () (Department of Economics, University of Évora)

Abstract

The 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.

Suggested Citation

  • Carlos Vieira, 2004. "The Deficit?Interest Rate Connection: an empirical assessment of the EU," Economics Working Papers 5_2004, University of Évora, Department of Economics (Portugal).
  • Handle: RePEc:evo:wpecon:5_2004
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    File URL: http://hdl.handle.net/10174/8409
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    Cited by:

    1. Andrea Terzi, 2007. "WP 2007-4 Fiscal deficits in the U.S. and Europe: Revisiting the link with interest rates," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2007-4, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.

    More about this item

    Keywords

    deficits; interest rates; causality; LA-VAR test; European Union;

    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

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