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Real Interest Rate Linkages: Testing for Common Trends and Cycles

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  • Darren Pain
  • Ryland Thomas

Abstract

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
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1997/wp65.pdf
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    References listed on IDEAS

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    Cited by:

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    2. 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.
    3. Chan Tze Haw & Khong Wye Leong Roy & Zubaidi Baharumshah, 2003. "Dynamic Financial Linkages of Japan And Asean Economies: An Application of Real Interest Parity," Capital Markets Review, Malaysian Finance Association, vol. 11(1&2), pages 23-40.
    4. Chan, Tze-Haw, 2012. "Assessing the international parity conditions and transmission mechanism for Malaysia-China," MPRA Paper 38930, University Library of Munich, Germany.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.

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