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Who was in the driving seat in Europe during the nineties, International financial markets or the BUBA?

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  • Roger Hammersland

    ()
    (Norges Bank)

Abstract

The purpose of this paper is to reexamine empirically the relationship between long-term interest rates in well integrated ?nancial markets. The analysis focuses on long-term interest rates in the US and Germany and has been carried out within the framework of a ?ve dimensional VAR for the simultaneous determination of short- and long-term interest rates in the US and Germany and the rate of exchange rate depreciation. The results strongly support the existence of a long-run relationship between the long-term German and the longterm US interest rate and imply a full pass-through of changes in the long-term US rate into the corresponding German rate. The analysis also substantiates that the direction of causality goes from the longterm US to the long-term German interest rate. With regard to the possibility of controlling the long end of the market on the part of the Bundesbank, the paper apparently takes on a rather pessimistic view, as there is nothing to indicate a long-run relationship between shortand long-term German interest rates. However, the strong in?uence that short-term German interest rates exhibit on German long-term interest rates in the very short run according to the structural model of this paper, might be taken to indicate that the opposite is the case, as e ects originating from expectations of future short-term interest rates might totally neutralize an unequivocally positive short-run portfolio e ect in the long run. If this is the case, there is nothing strange to the fact that one is unable to identify a long-run relationship between short- and long-term German interest rates. On the contrary, it is exactly what to be expected if the monetary transmission mechanism works appropriately.

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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2004/20.

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Length: 32 pages
Date of creation: 31 Dec 2004
Date of revision:
Handle: RePEc:bno:worpap:2004_20

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Related research

Keywords: Cointegration; Simultaneous Equation Models; International Interest Rate Linkages; Transmission Mechanism;

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References

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  1. Gordon de Brouwer & Neil R. Ericsson, 1995. "Modelling Inflation in Australia," RBA Research Discussion Papers rdp9510, Reserve Bank of Australia.
  2. Johansen, Soren, 1992. "Testing weak exogeneity and the order of cointegration in UK money demand data," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 313-334, June.
  3. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
  4. Jeffrey A. Frankel, 1991. "Quantifying International Capital Mobility in the 1980s," NBER Chapters, in: National Saving and Economic Performance, pages 227-270 National Bureau of Economic Research, Inc.
  5. Urbain, J-P., 1991. "On Weak Exogeneity in Error Correction Models," Papers 9103, Liege - Centre de Recherches Economiques et Demographiques.
  6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  7. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  9. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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Cited by:
  1. Roger Hammersland, 2004. "Large T and small N : A three-step approach to the identification of cointegrating relationships in time series models with a small cross-sectional dimension," Working Paper 2004/15, Norges Bank.

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