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Did capital market convergence lower the effectiveness of the interest rate as a monetary policy tool?

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Author Info
Jansen, Pieter W. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
Abstract

International capital market convergence reduces the ability for monetary authorities to set domestic monetary conditions. Traditionally, monetary policy transmission is channelled through the short-term interest rate. Savings and investment decisions are effected through the response of the bond yield to changes in the short-term interest rate. We find that capital market integration increased correlation between long-term interest rates across countries. Short-term interest rates also show more integration across countries and the correlation with the international business cycle has increased. A stronger linkage between international economic conditions and bond yields has important implications for the effectiveness of monetary policy. Monetary policy makers, especially in small countries, will face more difficulties in influencing domestic conditions in the bond market when they apply the traditional monetary policy framework in case of a country specific shock.

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Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0010.

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Date of creation: 2006
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Handle: RePEc:dgr:vuarem:2006-10

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Related research
Keywords: Monetary policy; Term structure of interest rates; International capital market convergence;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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    Other versions:
  3. 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.
  4. Frank A. G. Den Butter & Pieter W. Jansen, 2004. "An empirical analysis of the German long-term interest rate," Applied Financial Economics, Taylor and Francis Journals, vol. 14(10), pages 731-741, June. [Downloadable!] (restricted)
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  5. 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)
  6. 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)
  7. H. Sonmez Atesoglu, 2005. "Monetary policy and long-term interest rates," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 27(3), pages 533-539, April. [Downloadable!] (restricted)
  8. Kramer, Jorg, 1998. "Determinants of the Expected Real Long-Term Interest Rates in the G7-Countries," Applied Economics, Taylor and Francis Journals, vol. 30(2), pages 279-85, February. [Downloadable!] (restricted)
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