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Convergence and Anchoring of Yield Curves in the Euro Area

Author

Listed:
  • Michael Ehrmann

    (European Central Bank)

  • Marcel Fratzscher

    (European Central Bank)

  • Refet S Güürkaynak

    (Bilkent University and CEPR)

  • Eric T Swanson

    (Federal Reserve Bank of San Francisco)

Abstract

We study the convergence of European bond markets and the anchoring of inflation expectations in the euro area from 1993 to 2008, using high-frequency bond yield data for France, Germany, Italy, and Spain; some smaller euro-area countries; and a control group comprising the United Kingdom, Denmark, and Sweden. We find that Economic and Monetary Union (EMU) 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. 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 and the loose exchange rate peg of the 1990s. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Michael Ehrmann & Marcel Fratzscher & Refet S Güürkaynak & Eric T Swanson, 2011. "Convergence and Anchoring of Yield Curves in the Euro Area," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 350-364, February.
    • Handle: RePEc:tpr:restat:v:93:y:2011:i:1:p:350-364
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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