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The Interaction between American and European IRS Interest Rates

Author

Listed:
  • Giovanni Verga
  • Federica Trani
  • Nicoleta Vasilcovschi

Abstract

European interest rates movements are affected by various internal and external factors. This paper studies the link between European and American short- and long-term interest rates. In particular, we consider the forward interest rates coming from euro and dollar IRS term structures. The econometric techniques employed are co-integration, Granger-causality, OLS and GMM. Our results indicate that European remote settlement forward and long-term interest rates are primarily driven by US rates and confirm that the causality acts mainly from the US to the Eurozone. This was true even during the recent periods of European Central Bank quantitative easing. These factors weaken the ECB’s ability to intervene. In fact, we found the impact of American monetary policy on long-term interest rates to be also relevant for European bonds. JEL Codes - C51; E47; E58

Suggested Citation

  • Giovanni Verga & Federica Trani & Nicoleta Vasilcovschi, 2018. "The Interaction between American and European IRS Interest Rates," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 65(1), pages 81-96, March.
    • Handle: RePEc:aic:saebjn:v:65:y:2018:i:1:p:81-96:n:100
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    forward interest rates; euro and dollar; cointegration; causality; dynamic;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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