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 simple Granger causality tests based on a bivariate
framework, comprising merely of budget deficit and interest rate.
