IDEAS home Printed from https://ideas.repec.org/a/eee/revfin/v11y2002i2p119-130.html
   My bibliography  Save this article

Long-term nominal interest rates and domestic fundamentals

Author

Listed:
  • Caporale, Guglielmo Maria
  • Williams, Geoffrey

Abstract

This paper investigates the information content of domestic macroeconomic developments for the determination of nominal long‐term interest rates in the G7. We show that when an econometric methodology is followed, which takes into account the stationarity, cointegration, and exogeneity features of the data, well‐specified equations can be estimated, which confirm the importance of fiscal and monetary developments in the determination of long‐term interest rates. The results are contrary to those that one would expect from standard finance theory, which suggests that interest rates are determined by market participants. They reveal that inflation uncertainty and the quality of debt are important factors in each of the countries considered. In addition, there is a high degree of uniformity in the structure of the estimated relationships, suggesting that economic performance is of greater importance than institutional diversity in the determination of long‐term rates.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Caporale, Guglielmo Maria & Williams, Geoffrey, 2002. "Long-term nominal interest rates and domestic fundamentals," Review of Financial Economics, Elsevier, vol. 11(2), pages 119-130.
    • Handle: RePEc:eee:revfin:v:11:y:2002:i:2:p:119-130
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1058-3300(02)00038-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hall, S G, 1991. "The Effect of Varying Length VAR Models on the Maximum Likelihood Estimates of Cointegrating Vectors," Scottish Journal of Political Economy, Scottish Economic Society, vol. 38(4), pages 317-323, November.
    2. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 99-125.
    3. Correia-Nunes, Jose & Stemitsiotis, Loukas, 1995. "Budget Deficit and Interest Rates: Is There a Link? International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 425-449, November.
    4. Giovannini, Alberto & Piga, Gustavo, 1992. "Understanding the High Interest Rates on Italian Government Securities," CEPR Discussion Papers 720, C.E.P.R. Discussion Papers.
    5. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-348, August.
    6. Favero, Carlo A & Giavazzi, Francesco & Spaventa, Luigi, 1997. "High Yields: The Spread on German Interest Rates," Economic Journal, Royal Economic Society, vol. 107(443), pages 956-985, July.
    7. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    8. Mosconi, Rocco & Giannini, Carlo, 1992. "Non-causality in Cointegrated Systems: Representation Estimation and Testing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 399-417, August.
    9. Ford, Robert & Laxton, Douglas, 1999. "World Public Debt and Real Interest Rates," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(2), pages 77-94, Summer.
    10. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
    11. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
    12. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43, National Bureau of Economic Research, Inc.
    13. Phillips, P C B, 1991. "Optimal Inference in Cointegrated Systems," Econometrica, Econometric Society, vol. 59(2), pages 283-306, March.
    14. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-276, June.
    15. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    16. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
    17. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-49.
    18. Breedon, Francis & Henry, Brian & Williams, Geoffrey, 1999. "Long-Term Real Interest Rates: Evidence on the Global Capital Market," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(2), pages 128-142, Summer.
    19. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71(3), pages 280-280.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:hal:spmain:info:hdl:2441/5221 is not listed on IDEAS
    2. repec:spo:wpmain:info:hdl:2441/5221 is not listed on IDEAS
    3. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
    4. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September.
    5. Davidson, James, 1998. "Structural relations, cointegration and identification: some simple results and their application," Journal of Econometrics, Elsevier, vol. 87(1), pages 87-113, August.
    6. Norman J. Morin, 2006. "Likelihood ratio tests on cointegrating vectors, disequilibrium adjustment vectors, and their orthogonal complements," Finance and Economics Discussion Series 2006-21, Board of Governors of the Federal Reserve System (U.S.).
    7. Jacqueline Pradel & Christophe Rault, 2003. "Exogeneity in Vector Error Correction Models with Purely Exogenous Long‐Run Paths," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 629-653, December.
    8. Neusser, Klaus, 2001. "A Multisectoral Log-Linear Model of Economic Growth with Marshallian Externalities," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 537-564, October.
    9. Masih, Abul M. M. & Masih, Rumi, 1999. "Are Asian stock market fluctuations due mainly to intra-regional contagion effects? Evidence based on Asian emerging stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 7(3-4), pages 251-282, August.
    10. Neil R. Ericsson & John S. Irons, 1995. "The Lucas critique in practice: theory without measurement," International Finance Discussion Papers 506, Board of Governors of the Federal Reserve System (U.S.).
    11. John S. Irons & N. Ericsson, "undated". "An early version of The Lucas Critique in Practice: Theory without Measurement," Home Pages _004, Massachussets Institute of Technology, Economics.
    12. Michael T. K. Horvath & Mark W. Watson, 1994. "Testing for Cointegration When Some of the Contributing Vectors are Known," NBER Technical Working Papers 0171, National Bureau of Economic Research, Inc.
    13. Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, June.
    14. Ericsson, Neil R & Hendry, David F & Mizon, Grayham E, 1998. "Exogeneity, Cointegration, and Economic Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 370-387, October.
    15. Catherine Bruneau & Eric Jondeau, 1999. "Long‐run Causality, with an Application to International Links Between Long‐term Interest Rates," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 545-568, November.
    16. Urbain, Jean-Pierre, 1995. "Partial versus full system modelling of cointegrated systems an empirical illustration," Journal of Econometrics, Elsevier, vol. 69(1), pages 177-210, September.
    17. Robinson, P.M. & Iacone, F., 2005. "Cointegration in fractional systems with deterministic trends," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 263-298.
    18. Campos, Julia & Ericsson, Neil R. & Hendry, David F., 1996. "Cointegration tests in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 70(1), pages 187-220, January.
    19. Wu, Jyh-lin, 1998. "Are budget deficits "too large"?: The evidence from Taiwan," Journal of Asian Economics, Elsevier, vol. 9(3), pages 519-528.
    20. Freeman, Mark C. & Groom, Ben & Panopoulou, Ekaterini & Pantelidis, Theologos, 2015. "Declining discount rates and the Fisher Effect: Inflated past, discounted future?," Journal of Environmental Economics and Management, Elsevier, vol. 73(C), pages 32-49.
    21. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, vol. 90(Nov), pages 609-642.
    22. Kim, In-Moo & Park, Joon Y., 2005. "Iterative Maximum Likelihood Estimation of Cointegrating Vectors," Working Papers 2005-02, Rice University, Department of Economics.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:revfin:v:11:y:2002:i:2:p:119-130. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620170 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.