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

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 long-term 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.