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Interdependence between the Euro area and the U.S.: what role for EMU?

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  • M. Ehrmann
  • M. Fratzscher

Abstract

This paper investigates whether the degree and nature of interdependence between the United States and the euro area have changed with the advent of EMU. Using real-time data, it addresses this issue from the perspective of financial markets by analysing the effects of monetary policy announcements and macroeconomic news on daily interest rates in the United States and the euro area. The paper finds that the interdependence of money markets has steadily increased over time, with the spillover effects from the United States to the euro area being somewhat stronger than in the opposite direction. Moreover, for the early stages of EMU, we find evidence that the markets were going through a learning process about the ECB monetary policy. Towards the end of our sample period, the importance attached to euro area consumer prices and M3 has reached levels that are remarkably similar to the role of German consumer prices and M3 for German interest rates prior to EMU. JEL Classification: E43, E52, F42

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Bibliographic Info

Article provided by Board of Governors of the Federal Reserve System (U.S.) in its journal Proceedings.

Volume (Year): (2003)
Issue (Month): ()
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Handle: RePEc:fip:fedgpr:y:2003:x:10

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Keywords: Monetary policy - United States ; Monetary policy - Europe ; Macroeconomics - United States ; Macroeconomics - Europe;

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  1. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  2. Gabriele Galati & Corrinne Ho, 2001. "Macroeconomic news and the euro/dollar exchange rate," BIS Working Papers 105, Bank for International Settlements.
  3. Becker, Kent G & Finnerty, Joseph E & Kopecky, Kenneth J, 1995. "Domestic macroeconomic news and foreign interest rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(6), pages 763-783, December.
  4. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Working Papers, Bank of Canada 01-5, Bank of Canada.
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  6. Gaspar, Vítor & Pérez Quirós, Gabriel & Sicilia, Jorge, 2001. "The ECB monetary policy strategy and the money market," Working Paper Series, European Central Bank 0069, European Central Bank.
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  9. Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 15(6), pages 853-878, December.
  10. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  11. Selva Demiralp & Oscar Jorda, . "The Announcement Effect: Evidence from Open Market Desk Data," Department of Economics, California Davis - Department of Economics 01-04, California Davis - Department of Economics.
  12. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports, Federal Reserve Bank of New York 76, Federal Reserve Bank of New York.
  13. Kim, Suk-Joong & Sheen, Jeffrey, 1998. "International Linkages and Macroeconomic News Effects on Interest Rate Volatility - Australia and the US'," Working Papers 11, University of Sydney, School of Economics.
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