Emerging Market Economies and the World Interest Rate
William D. Lastrapes
University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics
July 3, 2014
We use the estimated common factor from a dynamic factor model of industrialized economy interest rates as a measure of the underlying world interest rate. Our innovation is to exploit information from observed yields in many countries about global capital markets, rather than rely solely on US yields as is typical of the empirical literature. We show that rates in these countries closely conform to the world rate in the face of global shocks since the late 1980's, which is consistent with capital market integration. Using a FAVAR, we examine the role of our estimated world rate in explaining interest rates from emerging market countries. We find evidence of capital market integration for these countries, at least in the long-run.
Number of Pages in PDF File: 46
Keywords: FAVAR, dynamic factor models, capital market integration, capital mobility
JEL Classification: O1, F3, F4
Date posted: July 5, 2014
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