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.
