Short and long-run effects of budget deficits on interest rates

Abstract

This paper, using data of the Greek economy and taking previous empirical work as its point of departure, explores the linkage between budget deficits and interest rates. Within the methodological framework of cointegration, ECM strategy, and several diagnostic and specification tests, the main purpose of this paper is to test empirically the Keynesian proposition and the Ricardian equivalence hypothesis. From the perspective of this study, the empirical findings support the Keynesian model of a significant and positive relationship between budget deficits and interest rates.

JEL Classification: H60, H62