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Title: The Deficit–Interest Rate Connection: an empirical assessment of the EU
Authors: Vieira, Carlos
Keywords: deficits
interest rates
LA-VAR test
European Union
Issue Date: 2004
Citation: Vieira, C. (2004),The Deficit–Interest Rate Connection:an empirical assessment of the EU, Documento de Trabalho nº 2004/05, Universidade de Évora, Departamento de Economia.
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.
Type: workingPaper
Appears in Collections:ECN - Working Papers (RePEc)

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