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

Author

Listed:
  • Azadeh Rahimi
  • Marc Lavoie

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, University of Ottawa [Ottawa])

  • Ba Chu

    (Carleton University)

Abstract

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.

Suggested Citation

  • Azadeh Rahimi & Marc Lavoie & Ba Chu, 2016. "Linear and nonlinear Granger causality between short-term and long-term interest rates during business cycles," Post-Print hal-01343734, HAL.
    • Handle: RePEc:hal:journl:hal-01343734
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    Cited by:

    1. Xiaojuan He & Dervis Kirikkaleli & Melike Torun & Zecheng Li, 2021. "Modeling Economic Risk in the QISMUT Countries: Evidence From Nonlinear Cointegration Tests," SAGE Open, , vol. 11(4), pages 21582440211, October.
    2. Hassan Tawakol A. Fadol, 2020. "Study the Possibility of Address Complex Models in Linear and Non-Linear Causal Relationships between Oil Price and GDP in KSA: Using the Combination of Toda-Yamamoto, Diks-Panchenko and VAR Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 10(6), pages 672-678.
    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. Gözde YILDIRIM, Zafer ADALI, 2018. "Linear and Non-Linear Causality Tests of Stock Price and Real Exchange Rate Interactions in Turkey," Fiscaoeconomia, Tubitak Ulakbim JournalPark (Dergipark), issue 1.

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