THE CAUSALITY BETWEEN BUDGET DEFICIT AND INTEREST-RATES IN JAPAN - ANAPPLICATION OF TIME-SERIES ANALYSIS

Applying the Engle-Granger two-step procedure, this study finds that n either budget deficits, short-term interest rates and prices in one mo del nor budget deficits and long-term interest rates in the other mode l are cointegrated in Japan. Moreover, this study finds no causality b etween budget deficits and long-term interest rates but detects feedba ck causality between budget deficits and short-term interest rates in Japan using Hsiao's version of the Granger causality method with the a id of cointegration.