On Budget Deficits And Interest Rates: Another Look At The Evidence

Ali Darrat

International Economic Journal, 2002, vol. 16, issue 2, 19-29

Abstract: This paper revisits the relationship between government budget deficits and interest rates in Greece. Contrary to the results of Vamvoukas (1997), the evidence I deduce from system estimations of error-correction models consistently denies any causal impact of the deficits on interest rates. Indeed, the high correlation observed between the two variables appears to the outcome of interest rates causing purposeful changes in the stance of fiscal policy. These findings stand up to numerous sensitivity tests and provide further support to the overwhelming evidence against the crowding-out hypothesis, [E6, H6]

Date: 2002
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DOI: 10.1080/10168730200000010

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