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Equal size, equal role? Interest rate interdependence between the euro area and the United States

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Author Info
Michael Ehrmann () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Marcel Fratzscher () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

This paper investigates whether the degree of interdependence between the United States and the euro area economies has changed with the advent of EMU. It addresses this issue from the perspective of financial markets by analysing the effects of monetary policy and macroeconomic news on daily interest rates. First, the paper finds that the interdependence of money markets has increased strongly around EMU. Although spillover effects from the United States to the euro area remain stronger than in the opposite direction, US markets have started reacting to euro area developments since the onset of EMU. Second, certain US macroeconomic news affect euro area money markets, especially in recent years. Finally, we show that US macroeconomic news have become good leading indicators for economic developments in the euro area, indicating that the higher money market interdependence is at least partly explained by the increased real integration of the two economies.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 342.

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Length: 50 pages
Date of creation: Apr 2004
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Handle: RePEc:ecb:ecbwps:20040342

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Related research
Keywords: interdependence; announcements; news; money markets; real-time data; United States; euro area.;

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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
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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References listed on IDEAS
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.:
  1. Kim, Suk-Joong & Sheen, Jeffrey, 2000. "International linkages and macroeconomic news effects on interest rate volatility -- Australia and the US," Pacific-Basin Finance Journal, Elsevier, vol. 8(1), pages 85-113, March. [Downloadable!] (restricted)
    Other versions:
  2. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Working Papers 01-5, Bank of Canada. [Downloadable!]
  3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
  4. Vitor Gaspar & Jorge Sicilia & Gabriel Perez-Quiros, 2001. "The ECB monetary policy strategy and the money market," Working Paper Series 069, European Central Bank. [Downloadable!]
    Other versions:
  5. Ehrmann, Michael & Fratzscher, Marcel, 2003. "Monetary Policy Announcements and Money Markets: A Transatlantic Perspective," International Finance, Blackwell Publishing, vol. 6(3), pages 309-28, Winter. [Downloadable!] (restricted)
  6. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-16, Duke University, Department of Economics. [Downloadable!]
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  7. Daniel L. Thornton, 1998. "Tests of the market's reaction to federal funds rate target changes," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 25-36. [Downloadable!]
  8. Linda Goldberg & Deborah Leonard, 2003. "What moves sovereign bond markets? The effects of economic news on U.S. and German yields," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Sep. [Downloadable!]
  9. Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, vol. 53(1), pages 219-265, 02. [Downloadable!] (restricted)
  10. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports 76, Federal Reserve Bank of New York. [Downloadable!]
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  11. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June. [Downloadable!] (restricted)
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  12. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers 784, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  13. Gabriele Galati & Corrinne Ho, 2003. "Macroeconomic News and the Euro/Dollar Exchange Rate," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(3), pages 371-398, November. [Downloadable!] (restricted)
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