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Linear and nonlinear Granger causality between short-term and long-term interest rates during business cycles

Listed author(s):
  • Azadeh Rahimi
  • Marc Lavoie

    (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, University of Ottawa [Ottawa])

  • Ba Chu

    (Carleton University)

This paper is about the causal relationship between short-term and long-term interest rates in the U.S. and Canada. To that end, we apply a linear Granger causality test introduced by Toda-Yamamoto (1995) and the nonlinear Granger causality test of Diks and Panchenko (2006). By combining linear causality effects with the nonlinear ones, it is seen that the most common Granger causality direction between short-term and long-term interest rates is a bidirectional one. We also find that nonlinear Granger causality can be found where no linear causality had been uncovered. Moreover, our findings show that during recent business cycles, the federal funds rate (in the U.S.) and the overnight rate (in Canada) still Granger-cause long-term interest rates significantly.

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Paper provided by HAL in its series Post-Print with number hal-01343734.

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Date of creation: Nov 2016
Publication status: Published in International Review of Applied Economics, Taylor & Francis (Routledge), 2016, 30 (6), (in press)
Handle: RePEc:hal:journl:hal-01343734
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