A Sequential Test for Structural Breaks in the Causal Linkages Between the G7 Short-Term Interest Rates

Marco Barassi, Guglielmo Maria Caporale and Stephen Hall

Open Economies Review, 2005, vol. 16, issue 2, 107-133

Abstract: This paper investigates changes in the causal structure linking the G-7 short-term rates by using a sequential test for the constancy of the adjustment coefficients in error correction equations. This technique allows us to detect permanent structural breaks in the causal linkages. In this instance, the hypotheses of interest are the US world-wide leadership, the disengagement of UK monetary policy from those pursued in the Eurozone after the collapse of the ERM, and the German leadership hypothesis (GLH) within the European Union (EU). While we do not find any examples of reversal of causality, the evidence points to a break in the causal linkages between the UK and the German rates after the third/fourth quarter of 1992. The empirical results are also consistent with a US world-wide leadership and a weak German leadership within the Eurozone. Copyright Springer Science + Business Media, Inc. 2005

Keywords: Interest Rate Linkages; Long-Run Causality; Structural Breaks; Sequential Test (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s11079-005-5871-5

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