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Convergence And Anchoring Of Yield Curves In The Euro Area

Listed author(s):
  • Refet Gurkaynak

    (Bilkent University)

  • Marcel Fratzscher

    (ECB)

  • Eric Swanson

    (FRB San Francisco)

  • Michael Ehrmann

    (ECB)

We study the convergence of European bond markets and the anchoring of inflation expectations in the euro area using high-frequency bond yield data for France, Germany, Italy, and Spain as well as smaller euro area countries and a control group comprising the UK, Denmark, and Sweden. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, we present evidence that the elimination of exchange rate risk and the adoption of a common monetary policy were the primary drivers of bond market convergence in the euro area, as opposed to fiscal policy restraint and the loose exchange rate peg of the 1990s.

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File URL: https://economicdynamics.org/meetpapers/2009/paper_897.pdf
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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 897.

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Date of creation: 2009
Handle: RePEc:red:sed009:897
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  17. Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
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