Equal Size, Equal Role? Interest Rate Interdependence between the Euro Area and the United States

By Michael Ehrmann, Marcel Fratzscher. Social Science Research Network, 2004

225 citations recorded by the source corpus.

This paper investigates whether the degree and the nature of economic and monetary policy interdependence between the United States and the euro area have changed with the advent of EMU. Using real-time data, it addresses this issue from the perspective of financial markets by analysing the effects of monetary policy announcements and macroeconomic news on daily interest rates in the United States and the euro area. First, the paper finds that the interdependence of money markets has increased strongly around EMU. Although spillover effects from the United States to the euro area remain stronger than in the opposite direction, we present evidence that US markets have started reacting also to euro area developments since the onset of EMU. Second, beyond these general linkages, the paper finds that certain macroeconomic news about the US economy have a large and significant effect on euro area money markets, and that these effects have become stronger in recent years. Finally, we show that US macroeconomic news have become good leading indicators for economic developments in the euro area. This indicates that the higher money market interdependence between the United States and the euro area is at least partly explained by the increased real integration of the two economies in recent years.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/68d1c4c8963e3713067ce6e209165566d2e5dc4c

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Citations in the corpus

Capital Flows, Push versus Pull Factors and the Global Financial Crisis (2012, unknown): “A detailed account of the construction of the news component of the announcements and their financial market effects are provided in Andersen et al. (2007), Ehrmann and Fratzscher (2004, 2005), and Gürkaynak, Sack and Swanson (2005).”
Convergence and Anchoring of Yield Curves in the Euro Area (2008, unknown): “2007 , Ehrmann and Fratzscher , 2005 ) .”
Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison (2014, background): “This asymmetry has been found in sample periods covering conventional monetary policy by researchers including Ehrmann and Fratzscher (2005), though Gürkaynak and Wright (2011) found that some non-US conventional monetary policy announcements also affect the US yield curve.”
Questioni di Economia e Finanza (2010, unknown): “This evidence may also suggest that these employees are more likely to move from one job to another, possibly experiencing better working conditions in their new positions.”
What Explains Global Exchange Rate Movements during the Financial Crisis (2009, background): “Andersen et al. (2003), Ehrmann and Fratzscher (2005a), and Fratzscher (2008) provide a detailed account of the construction and validity of these data.”