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The Euro Area and World Interest Rates

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  • Chinn, Menzie David
  • Frankel, Jeffrey A.

Abstract

We analyze the behavior of world interest rates, focusing on the ramifications of European Monetary Union. Our analysis indicates that nominal US interest rates tend to drive European rates at both the short and long horizons. There is some evidence that US rates are becoming increasingly influenced by European rates, but the relationship is still far from symmetric, despite EMU. We also investigate the empirical determinants of real interest rates over the past decade and a half. Real US interest rates also have an influence upon European rates, although German rates do not appear to have a similar effect upon US rates. Conditioning on foreign interest rates, we find that real interest rates on government debt depend significantly upon current and expected levels of debt, in Europe as in the US.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt2nb2h4zr.

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Date of creation: 22 Nov 2003
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Handle: RePEc:cdl:ucscec:qt2nb2h4zr

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  1. Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
  2. Hans Christiansen & Charles Pigott, 1997. "Long-Term Interest Rates in Globalised Markets," OECD Economics Department Working Papers 175, OECD Publishing.
  3. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
  4. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
  5. Froot, Kenneth A & Frankel, Jeffrey A, 1989. "Forward Discount Bias: Is It an Exchange Risk Premium?," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 139-61, February.
  6. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
  7. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February.
  8. Kitchen, John, 2002. "A Note on Interest Rates and Structural Federal Budget Deficits," MPRA Paper 21069, University Library of Munich, Germany, revised Oct 2002.
  9. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-50, August.
  10. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  11. Ford, Robert & Laxton, Douglas, 1999. "World Public Debt and Real Interest Rates," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 77-94, Summer.
  12. Vassiliki Koutsogeorgopoulou, 2000. "A Post-Mortem on Economic Outlook Projections," OECD Economics Department Working Papers 274, OECD Publishing.
  13. Jeffrey A. Frankel and Alan T. MacArthur., 1987. "Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries," Economics Working Papers 8762, University of California at Berkeley.
  14. Jeffrey A. Frankel and Shang-Jin Wei., 1995. "European Integration and the Regionalization of World Trade and Currencies: The Economics and the Politics," Center for International and Development Economics Research (CIDER) Working Papers C95-053, University of California at Berkeley.
  15. Breedon, Francis & Henry, Brian & Williams, Geoffrey, 1999. "Long-Term Real Interest Rates: Evidence on the Global Capital Market," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 128-42, Summer.
  16. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  17. Brian Sack, 2000. "Deriving inflation expectations from nominal and inflation-indexed Treasury yields," Finance and Economics Discussion Series 2000-33, Board of Governors of the Federal Reserve System (U.S.).
  18. Eiji Fujii & Menzie D. Chinn, 2000. "Fin de Siecle Real Interest Parity," NBER Working Papers 7880, National Bureau of Economic Research, Inc.
  19. Manganelli, Simone & Hartmann, Philipp & Maddaloni, Angela, 2003. "The euro area financial system: structure, integration and policy initiatives," Working Paper Series 0230, European Central Bank.
  20. M. Ehrmann & M. Fratzscher, 2003. "Interdependence between the Euro area and the U.S.: what role for EMU?," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  21. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
  22. Artis, M. & Marcellino, M., 1998. "Fiscal Solvency and Fiscal Forecasting in Europe," Economics Working Papers eco98/2, European University Institute.
  23. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "Should the European Central Bank and the Federal Reserve be concerned about fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 333-389.
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Cited by:
  1. Linda S. Goldberg & Michael W. Klein, 2005. "Establishing Credibility: Evolving Perceptions of the European Central Bank," NBER Working Papers 11792, National Bureau of Economic Research, Inc.
  2. Stefano Schiavo, 2005. "Euro bonds: in search of financial spillovers," Sciences Po publications 2, Sciences Po.
  3. Mariam Camarero & Josep Lluis Carrion Silvestre & Cecilio Tamarit, 2006. "New evidence of the real interest rate parity for OECD countries using panel unit root tests with breaks," Working Papers in Economics 159, Universitat de Barcelona. Espai de Recerca en Economia.
  4. Weber, Enzo, 2007. "Who Leads Financial Markets?," MPRA Paper 5099, University Library of Munich, Germany, revised Oct 2007.
  5. Enzo Weber, 2007. "What Happened to the Transatlantic Capital Market Relations?," SFB 649 Discussion Papers SFB649DP2007-014, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. Carlos A. Primo Braga & Gallina A. Vincelette, 2011. "Sovereign Debt and the Financial Crisis : Will This Time Be Different?," World Bank Publications, The World Bank, number 2534, October.
  7. Michal Brzoza-Brzezina & Jesus Crespo Cuaresma, 2007. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 2007-06, Faculty of Economics and Statistics, University of Innsbruck.
  8. Irina Yakadina & Michael Kumhof, 2007. "Politically Optimal Fiscal Policy," IMF Working Papers 07/68, International Monetary Fund.
  9. repec:onb:oenbwp:y::i:139:b:1 is not listed on IDEAS
  10. Enzo Weber, 2006. "The Euro and the Transatlantic Capital Market Leadership: A Recursive Cointegration Analysis," SFB 649 Discussion Papers SFB649DP2006-056, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  11. Adam S. Posen & Daniel Popov Gould, 2006. "Has EMU Had Any Impact on the Degree of Wage Restraint?," Working Paper Series WP06-6, Peterson Institute for International Economics.
  12. John C. Bluedorn & Christopher Bowdler, 2005. "Monetary Policy and Exchange Rate Dynamics: New Evidence from the Narrative Approach to Shock Identification," Economics Series Working Papers 2005-W18, University of Oxford, Department of Economics.
  13. De Loubens, A. & Idier, J. & Jardet, C., 2007. "Determinants of long-term interest rates in the United States and the euro area: A multivariate approach," Working papers 170, Banque de France.

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