The causality between budget deficit and interest rates in Japan: an application of time series analysis

Abstract

Applying the Engle-Granger two-step procedure, this study finds that neither budget deficits, short-term interest rates and prices in one model nor budget deficits and longterm interest rates in the other model are cointegrated in Japan. Moreover, this study finds no causality between budget deficits and long-term interest rates but detects feedback causality between budget deficits and short-term interest rates in Japan using Hsiao's version of the Granger causality method with the aid of cointegration.