Cross-Country Co-movement in Long-Term Interest Rates: A DSGE Approach

Michael Chin, Thomai Filippeli and Konstantinos Theodoridis
Additional contact information
Michael Chin: Bank of England
Thomai Filippeli: Queen Mary University of London

No 753, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: Long-term interest rates in a number of small-open inflation targeting economies co-move more strongly with US long-term rates than with short-term rates in those economies. We augment a standard small open-economy model with imperfectly substitutable government bonds and time-varying term premia that captures this phenomenon. The estimated model fits a range of US and UK data remarkably well, and produces term premium estimates that are comparable to estimates from the affine term structure model literature. We find that the strong co-movement between US and UK long-term interest rates arises primarily via correlated policy rate expectations, rather than through correlated term premia. This is due to policymakers in both economies responding to foreign productivity and discount factor shocks that cause persistent changes in inflation. We also overcome the common failure of similar models to account for the large influence of foreign disturbances on domestic economies found empirically, where in our model around 40% of the variation in UK GDP can be explained by shocks originating in the US economy.

Keywords: DSGE model; Small open economy; Yield curve; Long-term interest rates; Term premia; Co-movement (search for similar items in EconPapers)
JEL-codes: E43 E44 F30 F44 F65 G15 (search for similar items in EconPapers)
Date: 2015-09-21
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://www.qmul.ac.uk/sef/media/econ/research/wor ... 2015/items/wp753.pdf (application/pdf)

Related works:
Working Paper: Cross-country co-movement in long-term interest rates: a DSGE approach (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:753

Access Statistics for this paper

More papers in Working Papers from Queen Mary University of London, School of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Nicholas Owen ( this e-mail address is bad, please contact ).