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What drives the global interest rate

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  • Ronald A. Ratti
  • Joaquin L. Vespignani

Abstract

In this paper we study the drivers of global interest rate. Global interest rate is defined as a principal component for the largest developed and developing economies? discount rates (the US, Japan, China, Euro area and India). A structural global factor-augmented error correction model is estimated. A structural change in the global macroeconomic relationships is found over 2008:09-2008:12, but not pre or post this GFC period. Results indicate that around 46% of movement in central bank interest rates is attributed to changes in global monetary aggregates (15%), oil prices (13%), global output (11%) and global prices (7%). Increases in global interest rates are associated with reductions in global prices and oil prices, increases in trade-weighted value of the US dollar, and eventually to reduce global output. Increases in oil prices are linked with increase in global inflation and global output leading to global interest rate tightening indicated by increases in central bank overnight lending rates.

Suggested Citation

  • Ronald A. Ratti & Joaquin L. Vespignani, 2015. "What drives the global interest rate," Globalization Institute Working Papers 241, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:241
    DOI: 10.24149/gwp241
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    2. Probst, Julius, 2019. "Global real interest rate dynamics from the late 19th century to today," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 522-547.
    3. Nagayasu, Jun, 2019. "Financial flows, global interest rates, and political integration," Finance Research Letters, Elsevier, vol. 31(C).

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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