Estimating the Causal Relationship among the Short-Term Interest Rate, the Inflation Rate, and the Budget Deficit based on Three-Variable VAR Models with MWALD Test for Causality in the Case of Canada

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Title: Estimating the Causal Relationship among the Short-Term Interest Rate, the Inflation Rate, and the Budget Deficit based on Three-Variable VAR Models with MWALD Test for Causality in the Case of Canada
Authors: Xing, Kai
Date: 2016-12
Abstract: This study examines the possible existing causal relationship among the short-term interest rate, inflation rate and budget deficit in their level logarithmic form. First, it summarizes a body of theoretical and empirical views about these relationships. Second, it investigates the causal relationships among the short-term interest rate, inflation rate and budget deficit by using the VAR models with the MWALD test for causality associated with two lag variables in each proposition. The data in this study is yearly observations for a 33-year period (1981 to 2014) from the Organization for Economic Cooperation and Development (OECD) on Canada. The main findings of the paper is that: (1) it was observed that the variables were found to be nonstationary; (2) it was revealed that there are no directional causality relationships in its level form among the short-term interest rate, inflation rate and budget deficit in the Canadian economy over that period. These imply that a budget deficit is a symptom of other economic variables; rather, than a cause of the short-term interest rate and inflation rate. Thus, if the goal of policymakers is to reduce the inflation rate and increase output, we should look to more direct problems than focusing on controlling the budget deficit.
URL: http://hdl.handle.net/10393/35776
CollectionScience économique - Mémoires // Economics - Research Papers
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