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An Open-Economy Macro-Finance Model of Internatinal Interdependence: The OECD, US and the UK

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  • Peter Spencer
  • Zhuoshi Liu

Abstract

This paper develops a multi-country macro-finance model to study international economic and financial linkages. This approach models economic and financial variables jointly using both to throw light on such issues. The world economy is modelled using data for the US and aggregate OECD economies as well as the US Treasury bond market, using latent variables to represent a common inflation trend and a US real interest rate factor. We find strong evidence of OECD effects on the US, calling into question the standard closed economy macro-finance specification. The two global latent variables also affect the UK economy, together with two additional UK-specific latent variables. These economic linkages also help to explain the comovement of yields in the US and UK Treasury bond markets.

Suggested Citation

  • Peter Spencer & Zhuoshi Liu, "undated". "An Open-Economy Macro-Finance Model of Internatinal Interdependence: The OECD, US and the UK," Discussion Papers 09/16, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:09/16
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    1. repec:ijc:ijcjou:y:2018:q:1:a:7 is not listed on IDEAS
    2. Mirko Abbritti & Salvatore Dell’Erba & Antonio Moreno & Sergio Sola, 2018. "Global Factors in the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 301-340, March.
    3. Finlay, Richard & Jääskelä, Jarkko P., 2014. "Credit supply shocks and the global financial crisis in three small open economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 270-276.
    4. Liu, Zhuoshi & Spencer, Peter, 2013. "Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 241-256.
    5. Richard Finlay & David Olivan, 2012. "Extracting Information from Financial Market Instruments," RBA Bulletin, Reserve Bank of Australia, pages 45-54, March.
    6. Abad, Pilar & Chuliá, Helena & Gómez-Puig, Marta, 2010. "EMU and European government bond market integration," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2851-2860, December.
    7. Seth Armitage & Janusz Brzeszczynski, 2010. "Forecasting UK Inflation: An Empirical AnalysisÂ," CFI Discussion Papers 1002, Centre for Finance and Investment, Heriot Watt University.
    8. Adam Traczyk, 2013. "Financial integration and the term structure of interest rates," Empirical Economics, Springer, vol. 45(3), pages 1267-1305, December.
    9. Fan, Longzhen & Johansson, Anders C., 2010. "China's official rates and bond yields," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 996-1007, May.
    10. Mun, Kyung-Chun, 2012. "The joint response of stock and foreign exchange markets to macroeconomic surprises: Using US and Japanese data," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 383-394.

    More about this item

    Keywords

    macroeconomics; spillover effects; common shocks; macro-finance model; the term structure of interest rates;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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