A Convergence Model of the Term Structure of Interest Rates
This paper develops a convergence model of the term structure of interest rates in the context of entering the EMU. Compared with the other models developed so far in this field, our model specification ensures convergence of the domestic short-term interest rates to the euro area ones. We achieve this convergence by stating that the spread between the domestic and euro short-term interest rates follows the Brownian bridge process. We also develop an econometric counterpart of the theoretical model. To address the problem of nonstationarity and nonlinearity of the model, the extended Kalman filter for coefficient estimation is applied.
|Date of creation:||09 Feb 2009|
|Date of revision:|
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- Favero, Carlo A. & Giavazzi, Francesco & Iacone, Fabrizio & Tabellini, Guido, 1997.
"Extracting Information from Asset Prices: The Methodology of EMU Calculators,"
CEPR Discussion Papers
1676, C.E.P.R. Discussion Papers.
- Favero, Carlo A. & Giavazzi, Francesco & Iacone, Fabrizio & Guido Tabellini, 2000. "Extracting information from asset prices: The methodology of EMU calculators," European Economic Review, Elsevier, vol. 44(9), pages 1607-1632, October.
- Carlo A. Favero & Francesco Giavazzi & Fabrizio Iacone & Guido Tabellini, . "Extracting Information from Asset Prices: the Methodology of EMU Calculators," Working Papers 113, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- David S. Bates, 1999. "Financial Markets' Assessment of EMU," NBER Working Papers 6874, National Bureau of Economic Research, Inc.
- Teresa Corzo Santamaria & E. S. Schwartz, 2000. "Convergence within the EU: Evidence from Interest Rates," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(2), pages 243-266, 07.
- Jesper Lund, 1999. "A Model for Studying the Effect of EMU on European Yield Curves," Review of Finance, European Finance Association, vol. 2(3), pages 321-363.
- Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
- De Grauwe, Paul, 1996. "Forward Interest Rates as Predictors of EMU," CEPR Discussion Papers 1395, C.E.P.R. Discussion Papers.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
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