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An empirical analysis of the German long-term interest rate

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  • Frank A. G. Den Butter
  • Pieter Jansen

Abstract

The short run and long run influences of the main determinants of the German long-term interest rate are estimated using quarterly data for the period 1982-2001. A major reason for the focus on the German interest rate is that this rate, and hence its determinants, will be dominant in explaining the developments of the long-term Euro-rate in the international capital market. The specification of the interest rate equation encompasses various theories on interest rate formation. Four of the analysed interest rate theories partially explain interest rate movement, and therefore together form an encompassing model in which the four theories are incorporated. The short-term German interest rate, the US and Japanese bond rates and the government balance appear to be the most prominent determinants of the German (and hence Euro) rate, but also the business cycle and the oil price have explanatory power of this interest rate.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 10 ()
Pages: 731-741

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Handle: RePEc:taf:apfiec:v:14:y:2004:i:10:p:731-741

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  1. Guglielmo Maria Caporale & Nikitas Pittis, 1997. "Domestic and external factors in interest rate determination," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 7(5), pages 465-471.
  2. M.M.G. Fase & P.J.G. Vlaar, 1997. "International convergence of capital market interest rates," WO Research Memoranda (discontinued) 519, Netherlands Central Bank, Research Department.
  3. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III," IMF Occasional Papers 164, International Monetary Fund.
  4. Garry J. Schinasi & T. Todd Smith & Charles Frederick Kramer, 2001. "Financial Implications of the Shrinking Supply of U.S. Treasury Securities," IMF Working Papers 01/61, International Monetary Fund.
  5. F. Brayton & P. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-42, Board of Governors of the Federal Reserve System (U.S.).
  6. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports, Bank of Canada 75, Bank of Canada.
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Cited by:
  1. Frank A.G. den Butter & Pieter W. Jansen, 2008. "Beating the Random Walk: a Performance Assessment of Long-term Interest Rate Forecasts," Tinbergen Institute Discussion Papers 08-102/3, Tinbergen Institute.
  2. Jansen, Pieter W., 2006. "Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low," Serie Research Memoranda 0011, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  3. Jansen, Pieter W., 2006. "Did capital market convergence lower the effectiveness of the interest rate as a monetary policy tool?," Serie Research Memoranda 0010, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.

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