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Temporal Causality between Budget Deficit and Interest Rate: The Case of South Africa

Josine Uwilingiye and Rangan Gupta ()

No 200708, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper investigates the direction of temporal causality between budget deficit and interest rate in South Africa using quarterly data for the period of 1961:02 to 2005:04, and also for annual data covering 1961 to 2005. Based on a multivariate Vector Error Correction Model (VECM), estimated using Johansen’s (1991, 1995) Maximum Likelihood Approach, we find that budget deficit Granger causes interest rate in the quarterly data. However, for the annual data, no causal relationship could be detected between the budget deficit and the Treasury bill rate. The two variables of interest are, however, positively cointegrated for both data frequency. Interestingly though, exactly the same results were obtained from the simple Granger causality tests based on a bivariate framework, comprising merely of budget deficit and interest rate.

Keywords: Cointegration Test; Granger Causality Test; Vector Autoregressive Model; Vector Error Correction Model (search for similar items in EconPapers)
JEL-codes: C01 C32 H20 H50 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007-06
New Economics Papers: this item is included in nep-afr
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