International interest rate linkages: implications for monetary policy

Abstract

The paper explores the implications for monetary policy from the greater integration of major capital markets since 1980 using long‐term interest rates. The empirical approach is the multivariate vector moving average GARCH model, which examines the nature of the spillover mechanism across markets. The results have shown that since 1990 there has been a stronger linkage among major bond markets at the volatility level. Evidence that globalization has seriously affected the behavior of interest rates and made them more synchronized across countries is suggested from the way disturbances in a major market spill over fast and heavily, at times, to other related markets thereby affecting the conduct of monetary policy in all involved parties. This happens because investors now have more information about and choices of bonds from many countries and that makes them efficient in their assessment of assets. Therefore, their concerted actions generate more volatility as they continuously rebalance their global portfolios.

Citation

Laopodis, N.T. (2003), "International interest rate linkages: implications for monetary policy", Managerial Finance, Vol. 29 No. 11, pp. 1-16. https://doi.org/10.1108/03074350310768535