IDEAS home Printed from
   My bibliography  Save this paper

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.

Suggested Citation

  • Darren Pain & Ryland Thomas, 1997. "Real Interest Rate Linkages: Testing for Common Trends and Cycles," Bank of England working papers 65, Bank of England.
  • Handle: RePEc:boe:boeewp:65

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. 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.
    2. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-360, Oct.-Dec..
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    4. 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.
    5. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
    6. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 369-380, October.
    7. 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 771-779, November.
    8. De Grauwe, Paul, 1989. "Is the European Monetary System a DM-Zone?," CEPR Discussion Papers 297, C.E.P.R. Discussion Papers.
    9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    10. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
    11. repec:syd:wpaper:144 is not listed on IDEAS
    12. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-840, September.
    13. Andrew G Haldane & Mahmood Pradhan, 1992. "Testing real interest parity in the European Monetary System," Bank of England working papers 2, Bank of England.
    14. 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 389-394, August.
    15. Bagher Modjtahedi, 1987. "An Empirical Investigation into the International Real Interest Rate Linkages," Canadian Journal of Economics, Canadian Economics Association, vol. 20(4), pages 832-854, November.
    16. Alok Bhargava, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 369-384.
    17. repec:fgv:epgrbe:v:47:n:2:a:1 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Everaert, Gerdie, 2014. "A panel analysis of the fisher effect with an unobserved I(1) world real interest rate," Economic Modelling, Elsevier, vol. 41(C), pages 198-210.
    2. Chan, Tze-Haw, 2002. "Dynamic financial linkages among the Asia Pacific economies: an empirical assessment of real interest parity condition," MPRA Paper 34642, University Library of Munich, Germany.
    3. Christian Upper & Andreas Worms, 2003. "Real long-term interest rates and monetary policy: a cross-country perspective," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 234-257 Bank for International Settlements.
    4. Chan, Tze-Haw & Khong, Wye Leong Roy & Baharumshah, Ahmad Zubaidi, 2003. "Dynamic Financial Linkages of Japan and ASEAN Economies: An Application of Real Interest Parity," MPRA Paper 2209, University Library of Munich, Germany, revised 2003.
    5. H.a. Mitchell-innes & M.j. Aziakpono & A.p. Faure, 2007. "Inflation Targeting And The Fisher Effect In South Africa: An Empirical Investigation," South African Journal of Economics, Economic Society of South Africa, vol. 75(4), pages 693-707, December.
    6. Chan, Tze-Haw, 2012. "Assessing the international parity conditions and transmission mechanism for Malaysia-China," MPRA Paper 38930, University Library of Munich, Germany.
    7. Ahmad Zubaidi Baharumshah & Chan Tze Haw & A.Mansur M. Masih & Evan Lau, 2011. "Financial integration of East Asian economies: evidence from real interest parity," Applied Economics, Taylor & Francis Journals, vol. 43(16), pages 1979-1990.
    8. Kremer, Manfred, 1999. "Die Kapitalmarktzinsen in Deutschland und den USA: Wie eng ist der Zinsverbund? Eine Anwendung der multivariaten Kointegrationsanalyse," Discussion Paper Series 1: Economic Studies 1999,02, Deutsche Bundesbank.
    9. Chan, Tze-Haw, 2008. "International Parities among China and Her Major Trading Partners in Asia Pacific," MPRA Paper 15504, University Library of Munich, Germany, revised 06 Apr 2009.

    More about this item


    Access and download statistics


    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:boe:boeewp:65. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.