Budget deficits, capital flows, and long-term interest rates: Cointegration findings for the united kingdom

This study uses cointegration tools to decide whether a long-term relationship exists between budget deficits and nominal long-term interest rates in the United Kingdom, as previous regression estimates have implicitly assumed. Based on maximum eigenvalue, trace, and likelihood ratio tests, as well as two cointegrating vectors, this study finds that a long-term positive relationship exists between the nominal 20-year government bond rate and the central government budget deficit.