Linkages among Interest Rates in the United States, Germany and Norway

Abstract

The Johansen multivariate cointegration methodology is used to analyze relationships among short‐term and long‐term interest rates in the United States, Germany and Norway. A variance decomposition approach is applied to estimate the proportion of each interest rate's forecast error variance attributable to innovations in the other interest rates. Impulse response functions are plotted to illustrate the speed with which interest rate events are transmitted between capital markets. The analyses illustrate that US interest rates have a significant influence on both German and Norwegian interest rates, while the reverse effect is modest. Norway is also strongly exposed to German interest rate movements, which reflects the consequences of a small country linking its currency to the value of European currencies.

Common trends and common cycles among interest rates of the G7-countries

“…With regard to the long-run comovements among interest rates that were previously reported in the literature, we confirm the finding that cointegration is found only in the minority of the cases (RomeroAvila (2007); Zhou (2003); Bremnes et al (2001)) and in special circumstances (Poghosyan and de Haan (2007)). Concerning comovements in the short-run, our results suggest that more positive evidence reported in Kugler and Neusser (1993) cannot be generalized for all interest rates, time periods, and reasonable alternative estimation procedures.…”

Assessing the anchoring of inflation expectations

“…Among many others, Hall et al (1992), Bremnes et al (2001) and Hansen (2003) find that stationarity of the spreads is often not reflected in US data. The larger the difference in maturity the more often this outcome occurs.…”

Testing the expectations hypothesis when interest rates are near integrated

“…As such, nominal interest rates have been treated as integrated of order one in numerous empirical papers, including Karfakis and Moschos (1990), Bremnes et al (2001), Chong et al (2006), Kleimeier andSander (2006), De Graeve et al (2007) and Liu et al (2008). For theoretical purposes, the unit-root assumption can also be a useful modelling device to capture stylistically the highly persistent nature of interest rates in …nite samples, exempli…ed by Cogley and Sargent's (2001) approach to modelling the dynamics of a system of macroeconomic variables.…”