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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- 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.
- Favero, Carlo A. & Giavazzi, Francesco & Iacone, Fabrizio & Guido Tabellini, 2000.
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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.
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- 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.
- De Grauwe, Paul, 1996. "Forward Interest Rates as Predictors of EMU," CEPR Discussion Papers 1395, C.E.P.R. Discussion Papers.
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