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International Linkages in Short- and Long-Term Interest Rates

  • Guglielmo Maria Caporale

    (South Bank Business School, London)

  • Geoffrey Williams

    (London Business School)

This paper examines interest rate linkages in the G7 economies by testing for cointegration and employing the causality testing method for unstable systems recently introduced by Toda and Yamamoto (1995), which results in standard asymptotics. The results show that whilst domestic macroeconomic variables are important determinants of long-term interest rates, international linkages play a major role in the case of short-term rates. We also find that causation within the ERM runs from France to Germany, which suggests that, in order to function smoothly, a system such as the ERM requires its largest player to accommodate policy variation elsewhere, rather than impose its own monetary stance as in the ‘German Leadership Hypothesis’ (GLH). The main results are confirmed by the stability analysis.

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Article provided by Faculty of Economics and Business, University of Zagreb in its journal Zagreb International Review of Economics and Business.

Volume (Year): 3 (2000)
Issue (Month): 2 (November)
Pages: 39-61

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Handle: RePEc:zag:zirebs:v:3:y:2000:i:2:p:39-61
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