IDEAS home Printed from https://ideas.repec.org/p/vua/wpaper/2006-10.html
   My bibliography  Save this paper

Did capital market convergence lower the effectiveness of the interest rate as a monetary policy tool?

Author

Listed:
  • Jansen, Pieter W.

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

Abstract

International capital market convergence reduces the ability for monetary authorities to set domestic monetary conditions. Traditionally, monetary policy transmission is channelled through the short-term interest rate. Savings and investment decisions are effected through the response of the bond yield to changes in the short-term interest rate. We find that capital market integration increased correlation between long-term interest rates across countries. Short-term interest rates also show more integration across countries and the correlation with the international business cycle has increased. A stronger linkage between international economic conditions and bond yields has important implications for the effectiveness of monetary policy. Monetary policy makers, especially in small countries, will face more difficulties in influencing domestic conditions in the bond market when they apply the traditional monetary policy framework in case of a country specific shock.

Suggested Citation

  • Jansen, Pieter W., 2006. "Did capital market convergence lower the effectiveness of the interest rate as a monetary policy tool?," Serie Research Memoranda 0010, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  • Handle: RePEc:vua:wpaper:2006-10
    as

    Download full text from publisher

    File URL: http://degree.ubvu.vu.nl/repec/vua/wpaper/pdf/20060010.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    2. Bruneau, Catherine & Jondeau, Eric, 1999. " Long-Run Causality, with an Application to International Links between Long-Term Interest Rates," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 545-568, November.
    3. Sutton, Gregory D., 2000. "Is there excess comovement of bond yields between countries?," Journal of International Money and Finance, Elsevier, vol. 19(3), pages 363-376, June.
    4. M.M.G. Fase & P.J.G. Vlaar, 1997. "International convergence of capital market interest rates," WO Research Memoranda (discontinued) 519, Netherlands Central Bank, Research Department.
    5. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
    6. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-49.
    7. Frank A. G. Den Butter & Pieter Jansen, 2004. "An empirical analysis of the German long-term interest rate," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 731-741.
    8. Fell, J.P.C., 1996. "The Role of Short Rates and Foreign Long Rates in the Determination of Long-Term Interest Rates," Papers 4, European Monetary Institute.
    9. H. Sonmez Atesoglu, 2005. "Monetary policy and long-term interest rates," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(3), pages 533-539.
    10. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Monetary policy; Term structure of interest rates; International capital market convergence;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vua:wpaper:2006-10. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (R. Dam). General contact details of provider: http://edirc.repec.org/data/fewvunl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.