Budget deficit and interest rate: evidence from Malaysia 1965-2005

This study aims to analyze the impact of the budget deficit on interest rates in Malaysia for 40 years from 1965 to 2005. Towards the achievement of the objective, the study uses Granger causality and cointegration analysis. The primary results of the study shows that there is no significant short-term relationship between deficit budget and the interest rate. However, by using of co-integration test and error correction model test (ECM), it has found a significant long-term relationship between the budget deficit and interest rates. The present study also recommends for policy guidelines for the selection of national budget strategies to ensure sufficient options to take care of burdened with debt and inflation also a tolerable tax option in Malaysia