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.