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Equal size, equal role? Interdependence between the euro area and the United States

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  • Ehrmann, Michael
  • Fratzscher, Marcel

Abstract

This paper investigates whether the degree and the nature of economic and monetary policy 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. First, the paper finds that the interdependence of money markets has increased strongly around EMU. Although spillover effects from the United States to the euro area remain stronger than in the opposite direction, we present evidence that US markets have started reacting also to euro area developments since the onset of EMU. Second, beyond these general linkages, the paper finds that certain macroeconomic news about the US economy have a large and significant effect on euro area money markets, and that these effects have become stronger in recent years. Finally, we show that US macroeconomic news have become good leading indicators for economic developments in the euro area. This indicates that the higher money market interdependence between the United States and the euro area is at least partly explained by the increased real integration of the two economies in recent years. JEL Classification: E43, E52, F42

Suggested Citation

  • Ehrmann, Michael & Fratzscher, Marcel, 2004. "Equal size, equal role? Interdependence between the euro area and the United States," Working Paper Series 342, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2004342
    Note: 203739
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp342.pdf
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    References listed on IDEAS

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    1. repec:dug:journl:y:2016:i:3:p:127-137 is not listed on IDEAS
    2. POPOVICI, Oana Cristina, 2015. "A Volatility Analysis Of The Euro Currency And The Bond Market," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 19(1), pages 67-79.
    3. Linda S. Goldberg & Michael W. Klein, 2005. "Establishing Credibility: Evolving Perceptions of the European Central Bank," NBER Working Papers 11792, National Bureau of Economic Research, Inc.
    4. Rebecca Hellerstein, 2011. "Global bond risk premiums," Staff Reports 499, Federal Reserve Bank of New York.
    5. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 488, European Central Bank.
    6. Noor Azryani Auzairy & Chee Yong Thing, 2016. "Lending Interest Rates’ Relationships of Malaysia and Other Countries," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(3), pages 127-137, JUNE.
    7. Weber, Enzo, 2011. "What happened to the transatlantic capital market relations?," Economic Modelling, Elsevier, vol. 28(3), pages 877-884, May.
    8. Herwartz, Helmut, 2014. "Structural analysis with independent innovations," Center for European, Governance and Economic Development Research Discussion Papers 208, University of Goettingen, Department of Economics.

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    More about this item

    Keywords

    announcements; euro area.; interdependence; money markets; news; real-time data; United States;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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