Equal size, equal role? interest rate interdependence between the euro area and the United States
AbstractThis paper investigates whether the degree and the nature of economic and monetary policy interdependence between the United States and the euro area have changed with the advent of EMU. Using real-time data, it addresses this issue from the perspective of financial markets by analysing the effects of monetary policy announcements and macroeconomic news on daily interest rates in the United States and the euro area. 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, we present evidence that US markets have started reacting also to euro area developments since the onset of EMU. Second, beyond these general linkages, the paper finds that certain macroeconomic news about the US economy have a large and significant effect on euro area money markets, and that these effects have become stronger in recent years. Finally, we show that US macroeconomic news have become good leading indicators for economic developments in the euro area. This indicates that the higher money market interdependence between the United States and the euro area is at least partly explained by the increased real integration of the two economies in recent years.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 800.
Date of creation: 2004
Date of revision:
Other versions of this item:
- Michael Ehrmann & Marcel Fratzscher, 2005. "Equal Size, Equal Role? Interest Rate Interdependence Between the Euro Area and the United States," Economic Journal, Royal Economic Society, vol. 115(506), pages 928-948, October.
- Ehrmann, Michael & Fratzscher, Marcel, 2003. "Equal size, equal role? Interest rate interdependence between the Euro area and the United States," CFS Working Paper Series 2003/46, Center for Financial Studies (CFS).
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-09 (All new papers)
- NEP-EEC-2004-08-09 (European Economics)
- NEP-IFN-2004-08-09 (International Finance)
- NEP-MON-2004-08-09 (Monetary Economics)
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