IDEAS home Printed from
   My bibliography  Save this paper

The Cointegration of International Interest rates


  • Devine, Máiréad

    (Central Bank and Financial Services Authority of Ireland)


Cointegration is a new way of looking at the relationship between economic variables. If rNL and rDE are interest rates on the same instrument in the Netherlands and Germany respectively we would expect that they would be the same i.e. (1) rNL - rDE = 0 At any instant in time there may be a differential between the two interest rates i.e. (2) rNL - rDE = d If the action of the market through arbitrage or other processes tends to reduce d towards zero, whenever a non-zero d arises, the process will tend to move towards the relationship (1), even though (1) may never hold exactly. A relationship of this form is known as a cointegrating (or equilibrium) relationship. Such relationships may take many forms, may involve more than two variables and are often found in economics. The present analysis concerns the forms of cointegrating relationships that hold between international interest rates and the conclusions that can be drawn as regards the international convergence of interest rates. In a risk-free world with fixed exchange rates and perfect capital mobility interest rates will be the same in all countries. Any variations that occur will tend to vanish after a period of time. This equality of interest rates will define an equilibrium or cointegrating relationship between them. In a less than perfect world there can be other cointegrating equilibrium relationships. In Bretton Woods days, for example, the interest rate differential will have been determined mainly by capital controls and tended to some constant value. In such cases modern statistical analysis would have found equilibrium or cointegrating relationships even though interest rates had not converged. If we consider a period of time made up of three parts - the first in which such cointegrating relationships held and the second a time of transition to a third in which interest rates had converged. In this instance there is no unique equilibrium relation between the interest rates over the extended period and statistical analysis should fail to find a cointegrating relationship. Thus, the interpretation of findings of cointegration between interest rates does not imply convergence to zero differentials. The existence of convergence from one equilibrium with non-zero differentials to one with revised differentials implies that cointegration tests should fail. If we are living in a world of increasing financial liberalisation and harmonisation of world economies, then it is likely that such equilibrium relationships are changing and that we will not be able to find cointegration even though there may be a tendency to converge. The literature which has been reviewed in this regard has not addressed the points raised in the above discussion. Hence, it is not surprising that the results of the empirical evidence reviewed have presented divergent and sometimes ambiguous results. The relevance of international interest rate linkages to macroeconomic policy implementation suggests that the cointegration of long and short interest rates across boundaries warrants further attention.

Suggested Citation

  • Devine, Máiréad, 1997. "The Cointegration of International Interest rates," Research Technical Papers 1/RT/97, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:1/rt/97

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Cumby, Robert E. & Mishkin, Frederic S., 1986. "The international linkage of real interest rates: The European-US connection," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 5-23, March.
    2. Kirchgassner, Gebhard & Wolters, Jurgen, 1995. "Interest Rate Linkages in Europe before and after the Introduction of the European Monetary System: Some Empirical Results," Empirical Economics, Springer, vol. 20(3), pages 435-454.
    3. 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.
    4. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    5. Michael Mussa & Morris Goldstein, 1993. "The integration of world capital markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 245-330.
    6. Mark, Nelson C., 1985. "Some evidence on the international inequality of real interest rates," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 189-208, June.
    7. Taylor, Mark P, 1989. "Covered Interest Arbitrage and Market Turbulence," Economic Journal, Royal Economic Society, vol. 99(396), pages 376-391, June.
    8. Fell, J.P.C., 1996. "The Role of Short Rates and Foreign Long Rates in the Determination of Long-Term Interest Rates," Papers 4, European Monetary Institute.
    9. repec:syd:wpaper:144 is not listed on IDEAS
    10. 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.
    11. Karsten Biltoft & Christian Boersch, 1992. "Interest rate causality and asymmetry in the EMS," Open Economies Review, Springer, vol. 3(3), pages 297-306, October.
    12. Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
    Full references (including those not matched with items on IDEAS)

    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:cbi:wpaper:1/rt/97. 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: (Fiona Farrelly). 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.