Causal relationships between the interest rate and the monetary base

Abstract

This note presents a causality analysis of the time series corresponding to the monetary base and the nominal interest rate for 7-day active operations in the inter-enterprise market guaranteed by External Bonds. The period of analysis covers data from the first week of July 1983 to the third week of December 1984. The concept of statistical causality to be verified is the so-called “Granger causality”. The results achieved in the tests with twelve lags in the explanatory variables do not allow us to statistically reject the hypothesis of a double causality between the interest rate and the rate of variation of the monetary base. Nor can we statistically reject the hypothesis of double causality between the first difference of the interest rate and the rate of variation of the monetary base. The results on causality mentioned in this note say nothing about the contemporary correlation between the different series: nor can it be determined whether the causality found is a direct or “indirect” causality, as a consequence of the omission of other relevant variables in the analysis.

JEL classification: E43 ; E51