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Real Interest Rate Linkages: Testing for Common Trends and Cycles

  • Darren Pain
  • Ryland Thomas

This paper formed part of the Bank of England's contribution to a study by the G10 Deputies on saving, investment and real interest rates. It investigates a technique which allows economic times series to be decomposed into common trends and common cycles. This is applied to the movements of industrial countries' real interest rates. Two sets of real interest rates are considered: European short maturity rates and G3 long maturity rates. The analysis of European short rates reveals statistical evidence that the German real interest rate is the single dominant common trend and that the two common cycles are represented by the spreads of French and UK rates over German rates. The single common trend remains when the United States is added, but German leadership is then rejected in favour of US leadership. In the G3 long rate system, a single common trend appears to exist only after 1980.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1997/wp65.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 65.

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Date of creation: Jul 1997
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Handle: RePEc:boe:boeewp:65
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  1. Barro, R.J. & Martin, X.S., 1990. "World Real Interest Rates," RCER Working Papers 227, University of Rochester - Center for Economic Research (RCER).
    • Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
  2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  3. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 369-80, October.
  4. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
  5. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
  6. Karfakis, Costas J & Moschos, Demetrios M, 1990. "Interest Rate Linkages within the European Monetary System: A Time Series Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(3), pages 389-94, August.
  7. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-60, Oct.-Dec..
  8. repec:fgv:epgrbe:v:47:n:2:a:1 is not listed on IDEAS
  9. Bagher Modjtahedi, 1987. "An Empirical Investigation into the International Real Interest Rate Linkages," Canadian Journal of Economics, Canadian Economics Association, vol. 20(4), pages 832-54, November.
  10. Andrew G Haldane & Mahmood Pradhan, 1992. "Testing real interest parity in the European Monetary System," Bank of England working papers 2, Bank of England.
  11. Katsimbris, George M & Miller, Stephen M, 1993. "Interest Rate Linkages within the European Monetary System: Further Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 771-79, November.
  12. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 369-84, July.
  13. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  14. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  15. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  16. De Grauwe, Paul, 1989. "Is the European Monetary System a DM-Zone?," CEPR Discussion Papers 297, C.E.P.R. Discussion Papers.
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