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Interdependence between the euro area and the US: what role for EMU?

  • Ehrmann, Michael
  • Fratzscher, Marcel

This paper investigates whether the degree and nature of interdependence between the United States and the euro area have changed with the advent of EMU. Using real-time data, it addresses this issue from the perspective of financial markets by analysing the effects of monetary policy announcements and macroeconomic news on daily interest rates in the United States and the euro area. The paper finds that the interdependence of money markets has steadily increased over time, with the spillover effects from the United States to the euro area being somewhat stronger than in the opposite direction. Moreover, for the early stages of EMU, we find evidence that the markets were going through a learning process about the ECB monetary policy. Towards the end of our sample period, the importance attached to euro area consumer prices and M3 has reached levels that are remarkably similar to the role of German consumer prices and M3 for German interest rates prior to EMU. JEL Classification: E43, E52, F42

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Paper provided by European Central Bank in its series Working Paper Series with number 0200.

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Date of creation: Dec 2002
Date of revision:
Handle: RePEc:ecb:ecbwps:20020200
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  1. Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 853-878, December.
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  7. Gabriele Galati & Corrinne Ho, 2001. "Macroeconomic news and the euro/dollar exchange rate," BIS Working Papers 105, Bank for International Settlements.
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  9. Kim, Suk-Joong & Sheen, Jeffrey, 2000. "International linkages and macroeconomic news effects on interest rate volatility -- Australia and the US," Pacific-Basin Finance Journal, Elsevier, vol. 8(1), pages 85-113, March.
  10. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York.
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  14. Daniel L. Thornton, 1998. "Tests of the market's reaction to federal funds rate target changes," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 25-36.
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