International Linkages in Short- and Long-Term Interest Rates

Guglielmo Maria Caporale and Geoffrey Williams

Zagreb International Review of Economics and Business, 2000, vol. 3, issue 2, 39-61

Abstract: This paper examines interest rate linkages in the G7 economies by testing for cointegration and employing the causality testing method for unstable systems recently introduced by Toda and Yamamoto (1995), which results in standard asymptotics. The results show that whilst domestic macroeconomic variables are important determinants of long-term interest rates, international linkages play a major role in the case of short-term rates. We also find that causation within the ERM runs from France to Germany, which suggests that, in order to function smoothly, a system such as the ERM requires its largest player to accommodate policy variation elsewhere, rather than impose its own monetary stance as in the ‘German Leadership Hypothesis’ (GLH). The main results are confirmed by the stability analysis.

Keywords: Causality Testing; Cointegrated VARs; Interest Rate Linkages; ERM; German Leadership Hypothesis (GLH) (search for similar items in EconPapers)
JEL-codes: C32 C52 F3 (search for similar items in EconPapers)
Date: 2000
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