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A Cointegrating approach to budget deficits and long-term interest rates

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  • Bob Barnes

Abstract

A cointegrating approach is undertaken in this study to determine if there is a long-run equilibrium relationship between budget deficits and long-term interest rates for the United States and nine European countries. The cointegration approach consists of conducting cointegration tests and then testing several hypothesized values for the deficit and price expectations variables. The cointegration results suggest the existence of several significant cointegrating vectors for each of the ten countries, which would seem to appeal to the view of budget deficits having a positive impact on long-term interest rates. The hypothesized values for the deficit and price expectations variables are found to be too strict since the hypotheses are rejected in every case but one.

Suggested Citation

  • Bob Barnes, 2007. "A Cointegrating approach to budget deficits and long-term interest rates," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 127-133.
    • Handle: RePEc:taf:applec:v:40:y:2007:i:2:p:127-133
    DOI: 10.1080/00036840600749722
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    Cited by:

    1. Agnieszka Gehringer & Thomas Mayer, 2019. "Understanding low interest rates: evidence from Japan, Euro Area, United States and United Kingdom," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 28-53, February.

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