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What explains international interest rate co-movement?

Annika Camehl and Gregor von Schweinitz

No 3/2023, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We show that global supply and demand shocks are important drivers of interest rate co-movement across seven advanced economies. Beyond that, local structural shocks transmit internationally via aggregate demand channels, and central banks react predominantly to domestic macroeconomic developments: unexpected monetary policy tightening decreases most foreign interest rates, while expansionary local supply and demand shocks increase them. To disentangle determinants of international interest rate co-movement, we use a Bayesian structural panel vector autoregressive model accounting for latent global supply and demand shocks. We identify country-specific structural shocks via informative prior distributions based on a standard theoretical multi-country open economy model.

Keywords: informative priors; panel vector autoregressions; spillovers; structural vector autoregressions (search for similar items in EconPapers)
JEL-codes: C11 C30 E52 F42 (search for similar items in EconPapers)
Date: 2023, Revised 2023
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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