Budget deficits, money growth and causality: Further OECD evidence

Abstract

This paper investigates the causal linkage between budget deficits and money growth in seven major OECD countries using multivariate Granger-causality tests combined with Akaike's AIC criterion and Zellner's iterative seemingly unrelated regressions. The accommodation hypothesis that deficits Granger-cause positive long-run changes in money growth is systematically rejected across all countries. The reverse hypothesis that money growth Granger-causes long-run changes in deficits is also rejected across countries. These results suggest that monetary and fiscal policies are set independently in each of the OECD countries.