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The Term Structure of Interest Rates in the European Union

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Author Info
Minoas Koukouritakis () (Department of Economics, University of Crete)
Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada)

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Abstract

This paper uses cointegration and common trends techniques to investigate empirically the expectations hypothesis of the term structure of interest rates among the original 15 EU countries. By decomposing each term structure into its transitory and permanent components, we also examine whether the short or the long rate is weakly exogenous and thus determine the long run behavior of each term structure. The empirical results support the expectations theory of the term structure of interest rates for all the EU-15 countries. They also indicate that the long term interest rates are weakly exogenous for almost all the countries in our sample. Further, we investigate if the expectation theory of the term structure of interest rates is affected by other exogenous variables such as nominal and real exchange rates, inflation rates, inflation variance, money growth and its variance. Our evidence suggests that the inclusion of the other exogenous variables does not affect the expectations hypothesis for most of the EU-15 countries.

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File URL: http://economics.soc.uoc.gr/wpa/docs/Koukouritakis_Michelis_EU15_Term_Structure.pdf
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Publisher Info
Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0611.

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Length: 46 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:crt:wpaper:0611

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Related research
Keywords: Term Structure; European Union; Cointegration; Common Trends; Weak Exogeneity;

Other versions of this item:

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
F15 - International Economics - - Trade - - - Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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References listed on IDEAS
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  1. Gerlach, Stefan & Smets, Frank, 1997. "The term structure of Euro-rates: some evidence in support of the expectations hypothesis," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 305-321, April. [Downloadable!] (restricted)
    Other versions:
  2. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August. [Downloadable!] (restricted)
    Other versions:
  3. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct. [Downloadable!]
    Other versions:
  4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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  7. Wolters, Jurgen, 1998. "Cointegration and German Bond Yields," Applied Economics Letters, Taylor and Francis Journals, vol. 5(8), pages 497-502, August. [Downloadable!] (restricted)
  8. Holmes, Mark J & Pentecost, Eric J, 1997. "The Term Structure of Interest Rates and Financial Integration in the ERM," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(3), pages 237-47, July. [Downloadable!] (restricted)
  9. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier. [Downloadable!] (restricted)
  10. Robert J. Shiller & J. Huston McCulloch, 1987. "The Term Structure of Interest Rates," NBER Working Papers 2341, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  12. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February. [Downloadable!] (restricted)
  13. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
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  14. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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