This paper develops a multi-country macro-finance model to study international economic and financial linkages. This approach models economic and financial variables jointly using both to throw light on such issues. The world economy is modelled using data for the US and aggregate OECD economies as well as the US Treasury bond market, using latent variables to represent a common inflation trend and a US real interest rate factor. We find strong evidence of OECD effects on the US, calling into question the standard closed economy macro-finance specification. The two global latent variables also affect the UK economy, together with two additional UK-specific latent variables. These economic linkages also help to explain the comovement of yields in the US and UK Treasury bond markets.
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Paper provided by Department of Economics, University of York in its series Discussion Papers with number
09/16.
Length: Date of creation: Date of revision: Handle: RePEc:yor:yorken:09/16
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Find related papers by JEL classification: C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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.:
Dewachter, H.D.R. & Lyrio, M., 2003.
"Macro factors and the Term Structure of Interest Rates,"
Research Paper
ERS-2003-037-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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