Analyzing the Dynamic Relationship between Budget Deficit, Inflation, and Interest Rate (A Case from Jordan)

Abstract

This study, gathered the most important economic variables that influence different countries interest rate such as, inflation and public deficit. Interest rate and inflation play an important role in monetary policy, and influence different countries decisions making regarding economic practices. Also, budget deficit can be used as a tool to measure governments’ financial performances. This study comes to investigate the dynamic relationship between budget deficit, inflation, and interest rate in Jordan for the period span from 1992 to 2015. Through employing more advanced methodologies such as, Johansen Co Integration Test, and Granger Causality Test.Taking into consideration the econometrics analysis and johansen co integration test our study reported for a long-term relationship between budget deficit, inflation, and interest rate. Also according to the VECM model which refers to refers to there is a long run causality running from interest rate and inflation rate toward budget deficit. Also the results report for a short run causality running from inflation rate, and interest rate toward budget deficit. Finally according to the Granger Causality Test confirm only for a single directional causality running inflation rate to budget deficit. This result imply for short-run impact between budget deficit, and inflation. Finally, Granger Causality Test confirms a single directional causality when comparing running inflation rate to budget deficit, and this result implies for short-term impact between budget deficit, and inflation.

Keywords: Budget Deficit, Interest Rate, Inflation Rate, VAR Model, VECM Model.