Understanding International Long-term Interest Rate Comovement

Michael Chin, Ferre De Graeve, Thomai Filippeli and Konstantinos Theodoridis

A chapter in Essays in Honour of Fabio Canova, 2022, vol. 44B, pp 147-189 from Emerald Group Publishing Limited

Abstract: Long-term interest rates of small open economies (SOE) correlate strongly with the USA long-term rate. Can central banks in those countries decouple from the United States? An estimated Dynamic Stochastic General Equilibrium (DSGE) model for the UK (vis-á-visthe USA) establishes three structural empirical results: (1) Comovement arises due to nominal fluctuations, not through real rates or term premia; (2) the cause of comovement is the central bank of the SOE accommodating foreign inflation trends, rather than systematically curbing them; and (3) SOE may find themselves much more affected by changes in USA inflation trends than the United States itself. All three results are shown to be intuitive and backed by off-model evidence.

Keywords: DSGE model; small open economy; yield curve; long-term interest rates; term premia; comovement; E43; E44; F30; F44; F65; G15 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Understanding International Long-Term Interest Rate Comovement (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-90532022000044b005

DOI: 10.1108/S0731-90532022000044B005

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