Did capital market convergence lower the effectiveness of the interest rate as a monetary policy tool?
AbstractInternational 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0010.
Date of creation: 2006
Date of revision:
Contact details of provider:
Web page: http://www.feweb.vu.nl
Monetary policy; Term structure of interest rates; International capital market convergence;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-28 (All new papers)
- NEP-CBA-2006-07-28 (Central Banking)
- NEP-FIN-2006-07-28 (Finance)
- NEP-FMK-2006-07-28 (Financial Markets)
- NEP-IFN-2006-07-28 (International Finance)
- NEP-MAC-2006-07-28 (Macroeconomics)
- NEP-MON-2006-07-28 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- C. Bruneau & E. Jondeau, 1997.
"Long-run causality, with an application to international links between long-term interest rates,"
THEMA Working Papers
97-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Bruneau, Catherine & Jondeau, Eric, 1999. " Long-Run Causality, with an Application to International Links between Long-Term Interest Rates," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 545-68, November.
- Bruneau, C. & Jondeau, E., 1998. "Long-Run Causality, with an Application to International Links Between Long-Term Interest Rates," Working papers 53, Banque de France.
- 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
- 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.
- Butter, Frank A.G. den & Jansen, Pieter W., 2001.
"An empirical analysis of the German long-term interest rate,"
Serie Research Memoranda
0029, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
- Frank A. G. Den Butter & Pieter Jansen, 2004. "An empirical analysis of the German long-term interest rate," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 731-741.
- Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
- Jorg Kramer, 1998. "Determinants of the expected real long-term interest rates in the G7-countries," Applied Economics, Taylor & Francis Journals, vol. 30(2), pages 279-285, February.
- Martin Feldstein & Charles Horioka, 1979.
"Domestic Savings and International Capital Flows,"
NBER Working Papers
0310, National Bureau of Economic Research, Inc.
- Christian Pierdzioch, 2003. "Home-Product Bias, Capital Mobility, and the Effects of Monetary Policy Shocks in Open Economies," Kiel Working Papers 1141, Kiel Institute for the World Economy.
- Fell, J.P.C., 1996. "The Role of Short Rates and Foreign Long Rates in the Determination of Long-Term Interest Rates," Papers 4, European Monetary Institute.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (R. Dam).
If references are entirely missing, you can add them using this form.