The nonlinear causal relationship between short‐ and long‐term interest rates: An empirical assessment of the United States, the United Kingdom, and Japan

Huiqing Li and Yang Su

International Finance, 2021, vol. 24, issue 3, 332-355

Abstract: In this paper, we apply a rolling‐window strategy using data from the United States (US), the United Kingdom (UK), and Japan to determine the dynamic linear and nonlinear Granger causality relationship between short‐ and long‐term interest rates over time and visualize the results. Our findings from US data show an asymmetrical relationship between short‐ and long‐term interest rates. We find that in the overall sample period, the long‐term interest rate nonlinearly Granger‐causes the short‐term interest rate. Using the rolling‐window approach, when the start of the subsample is earlier than 2000 we find evidence that the long‐term interest rate Granger‐causes the short‐term interest rate, either linearly or nonlinearly, while in most of the subsamples the short‐term interest rate does not linearly or nonlinearly Granger‐cause the long‐term interest rate. However, for the UK and Japan, there are bidirectional Granger causality relationships between short‐ and long‐term interest rates.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:bla:intfin:v:24:y:2021:i:3:p:332-355

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