The Interaction between American and European IRS Interest Rates

Giovani Verga, Federica Trani, Nicoleta Vasilcovschi

Abstract


European interest rates movements are affected by various internal and external factors. This paper studies the link between European and American short- and long-term interest rates. In particular, we consider the forward interest rates coming from euro and dollar IRS term structures. The econometric techniques employed are co-integration, Granger-causality, OLS and GMM. Our results indicate that European remote settlement forward and long-term interest rates are primarily driven by US rates and confirm that the causality acts mainly from the US to the Eurozone. This was true even during the recent periods of European Central Bank quantitative easing. These factors weaken the ECB’s ability to intervene. In fact, we found the impact of American monetary policy on long-term interest rates to be also relevant for European bonds.


Keywords


fforward interest rates; euro and dollar; cointegration; causality; dynamic.

JEL Codes


C51; E47; E58.

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DOI: http://dx.doi.org/10.2478/saeb-2018-0006

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