Understanding International Long-term Interest Rate Comovement
Essays in Honour of Fabio Canova
ISBN: 978-1-80382-832-9, eISBN: 978-1-80382-831-2
Publication date: 21 September 2022
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-vis the 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.
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Acknowledgements
Acknowledgements
We would like to thank Paul Beaudry, Gianluca Benigno, Francesco Bianchi, Mark Carney, Giancarlo Corsetti, Charles Engel, Andrea Ferrero, Kristin Forbes, Richard Harrison, Peter Karadi, Robert Kollmann, Roland Meeks, David Miles, Stephen Millard, Marco Del Negro, Kalin Nikolov, Frank Schorfheide, Peter Spencer, Eric Swanson (discussant), Gregory Thwaites, Raf Wouters, Tao Zha as well as workshop and conference participants at Bank of England, Sveriges Riksbank, Norges Bank, Aarhus University, University of Glasgow, Lancaster University and Cardiff University for helpful discussions and comments. The authors declare that they have no relevant (non-)financial interests that relate to the research described in this chapter. The views expressed in this chapter solely represent those of the authors and should not be interpreted as the views of the European Stability Mechanism. Konstantinos Theodoridis acknowledges that most of the project was completed before he joined the European Stability Mechanism. This chapter represents the personal work and views of Michael Chin and has neither been reviewed nor endorsed by Norges Bank Investment Management, and the views expressed in this chapter do not necessarily reflect those of Norges Bank Investment Management. No representation or warranty is made by Michael Chin or Norges Bank Investment Management about the completeness or accuracy of any information provided herein, and such parties expressly disclaim all liability for any of the information contained in these materials.
Citation
Chin, M., De Graeve, F., Filippeli, T. and Theodoridis, K. (2022), "Understanding International Long-term Interest Rate Comovement", Dolado, J.J., Gambetti, L. and Matthes, C. (Ed.) Essays in Honour of Fabio Canova (Advances in Econometrics, Vol. 44B), Emerald Publishing Limited, Leeds, pp. 147-189. https://doi.org/10.1108/S0731-90532022000044B005
Publisher
:Emerald Publishing Limited
Copyright © 2022 Michael Chin, Ferre De Graeve, Thomai Filippeli and Konstantinos Theodoridis