Convergence and Anchoring of Yield Curves in the Euro Area

Michael Ehrmann, Marcel Fratzscher, Refet Gürkaynak and Eric Swanson

No 2007-24, Working Paper Series from 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 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.

Keywords: bond; markets (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 45
Date: 2007-11-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Note: PDF date: November 7, 2008.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Convergence and Anchoring of Yield Curves in the Euro Area (2011)
Working Paper: CONVERGENCE AND ANCHORING OF YIELD CURVES IN THE EURO AREA (2009)
Working Paper: Convergence and Anchoring of Yield Curves in the Euro Area (2007)
Working Paper: Convergence and anchoring of yield curves in the euro area (2007)
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DOI: 10.24148/wp2007-24

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