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The High Correlations of Prices and Interest Rates across Nations

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  • Roman Sustek

    (Bank of England)

  • Finn Kydland

    (University of California--Santa Barbara)

  • Espen Henriksen

    (University of Oslo)

Abstract

We document that at business cycle frequency, nominal variables, such as aggregate price levels and nominal interest rates, are more correlated across countries than real output. Since national central banks control the domestic money supply and their objective has been to keep the nominal environment stable this might seem puzzling. We ask whether a simple, transparent standard international business cycle model can account for these nominal as well as the real aspects of international business cycles. It can. Due to spillovers of technology shocks across countries, responses of national central banks to fluctuations in domestic output and inflation generate responses of prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce correlations like those in the data.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 773.

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Date of creation: 2008
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Handle: RePEc:red:sed008:773

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Cited by:
  1. Sustek, Roman, 2010. "Monetary aggregates and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(4), pages 451-465, May.
  2. Mumtaz, Haroon & Simonelli, Saverio & Surico, Paolo, 2009. "International comovements, business cycle and inflation: a historical perspective," Discussion Papers, Monetary Policy Committee Unit, Bank of England 28, Monetary Policy Committee Unit, Bank of England.
  3. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael, 2009. "Some problems in the testing of DSGE models," Cardiff Economics Working Papers, Cardiff University, Cardiff Business School, Economics Section E2009/31, Cardiff University, Cardiff Business School, Economics Section.
  4. Raphael A Auer & Aaron Mehrotra, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," BIS Working Papers, Bank for International Settlements 447, Bank for International Settlements.
  5. Vo Phuong Mai Le & Patrick Minford & Michael Wickens, 2009. " The ‘Puzzles’ Methodology: En Route to Indirect Inference?," CDMA Conference Paper Series, Centre for Dynamic Macroeconomic Analysis 0903, Centre for Dynamic Macroeconomic Analysis.
  6. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2010. "Interest Rate Co-movements, Global Factors and the Long End of the Term Spread," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-24, Scottish Institute for Research in Economics (SIRE).
  7. Lindenberg, Nannette & Westermann, Frank, 2012. "Common trends and common cycles among interest rates of the G7-countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(4), pages 1125-1140.
  8. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2012. "Interest rate co-movements, global factors and the long end of the term spread," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(1), pages 183-192.
  9. Roman Sustek, 2011. "Monetary Business Cycle Accounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 592-612, October.
  10. Saverio Simonelli & Haroon Mumtaz & Paolo Surico, 2009. "A Historical Perspective on International Co-movements: 1821-2007," 2009 Meeting Papers, Society for Economic Dynamics 523, Society for Economic Dynamics.
  11. Neely, Christopher J. & Rapach, David E., 2011. "International comovements in inflation rates and country characteristics," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(7), pages 1471-1490.

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