Linear and Non‐Linear Granger Causality Between Short‐Term and Long‐Term Interest Rates: A Rolling Window Strategy

Abstract

In this article, a rolling window strategy is used to detect the linear and non‐linear Granger causality relationships between the U.S. federal funds rate and the 10‐year government bond rate, during different time horizons, investigating whether these causalities change with the passing of time. For linear Granger causality tests, we apply the Toda and Yamamoto () approach and for non‐linear ones we use a non‐linear Granger causality test introduced by Diks and Panchenko (). Our findings show that during nearly all time periods there is a significant two‐way Granger causality relationship between these two interest rates.

Monetary policy and long‐term interest rates: Evidence from the U.S. economy

“…Finally, Rahimi, Chu, and Lavoie (2016, 2017) found time‐varying linear and non‐linear Granger causality relationships between FF and the 10‐year government bond. According to them, as the linear causality effect from FF to the 10‐year bond rate increases with the passing of time, there is a significant bidirectional Granger causality relationship during all time periods when the linear and non‐linear causality tests results are combined, with the impact of the long‐term interest rate on FF appearing to be more systematic.…”

Multifactor Keynesian models of the long-term interest rate

“…Deleidi and Levrero (2021) find the central bank can permanently affect the long-term interest rate through its influence on the short-term interest rate using US data. However, Rahimi (2014) and Rahimi, Chu, and Lavoie (2017) find a significant two-way Granger causality relationship between the short-term interest rate and the long-term interest rate in United States. Using data from six financial centers (US, eurozone, Germany, UK, Japan, and Canada), Gabrisch (2021) reports that Keynes's contention holds.…”

A Keynesian Approach to Modeling the Long-Term Interest Rate

“…The Keynesian approach to modeling long-term government bond yields has been revamped in recent years in several empirical studies, such as Akram and Das (2015, 2017, 2019, Akram and Li (2020a, 2020b, 2020c, 2020d, Akram andUddin (2020, 2021), Chakraborty (2016), Das and Akram (2020), Gabrisch (2021), Levrero and Deleidi (2020), Rahimi (2014), Rahimi, Chu, and Lavoie (2017), Simoski (2019), andVinod, Chakraborty, andKarun (2014). There are also a few theoretical studies, such as Akram (2021aAkram ( , 2021b and Wray (1992), that have advanced the Keynesian approach to interest rate modeling, building on Keynes's approach to interest rate dynamics, as reflected in Keynes (1937) and Robinson (1951), and money and credit as articulated in Keynes (1930Keynes ( , [19362007) and the works of Keynesians, such as Lavoie (1984).…”