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Domestic vs. International Correlations of Interest Rate Maturities


  • Joseph P Byrne

    () (University of Glasgow)

  • Giorgio Fazio

    () (University of Palermo, University of Glasgow)

  • Norbert Fiess

    () (World Bank)


The association between long and short interest rates is traditionally envisaged from a purely domestic perspective, where it is believed an empirical regularity. Hence, the weakening of this relationship in the first half of the 2000s has represented a conundrum, calling for a reassessment of the term structure and the conduct of monetary policy. Some commentators have called for investigations into the international dimension of this puzzle. Hence, in this paper we employ recent advances in panel data econometrics to investigate the co-movement of interest rate maturities both at the domestic and international levels for a sample of industrial countries. Specifically, we use the Ng (2006) spacings correlations approach to examine interest rates correlations between and within countries. Compared to alternatives, this method does not just estimate bivariate correlations, but also assesses the degree of panel correlation without being restricted by the assumption of either zero or complete panel correlation. We find very small correlations between the different maturities of domestic rates and much higher correlations of international rates. Moreover, international correlations between long rates are significantly higher than those between short rates. These findings suggest a scenario for national monetary policy, where financial globalization may have changed the transmission mechanism, advocating searches for the “missing” yield curve in its international dimension.

Suggested Citation

  • Joseph P Byrne & Giorgio Fazio & Norbert Fiess, 2010. "Domestic vs. International Correlations of Interest Rate Maturities," Economics Bulletin, AccessEcon, vol. 30(2), pages 1082-1090.
  • Handle: RePEc:ebl:ecbull:eb-10-00239

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    References listed on IDEAS

    1. Andrew Atkeson & Patrick J. Kehoe, 2009. "On the Need for a New Approach to Analyzing Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 389-425, National Bureau of Economic Research, Inc.
    2. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The Bond Yield "Conundrum" from a Macro-Finance Perspective," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 83-109, December.
    3. Mark M. Spiegel, 2007. "Financial globalization and monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov23.
    4. Philip R. Lane & Gian Maria Milesi-Ferretti, 2008. "The Drivers of Financial Globalization," American Economic Review, American Economic Association, vol. 98(2), pages 327-332, May.
    5. Eric T. Swanson & Tao Wu & Glenn D. Rudebusch, 2006. "The bond yield \\"conundrum\\" from a macro-finance perspective," Working Paper Series 2006-16, Federal Reserve Bank of San Francisco, revised 2006.
    6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
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    More about this item


    Financial globalization; yield spread; interest rates; spacings correlations;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance


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