Convergence and Anchoring of Yield Curves in the Euro Area

52 Pages Posted: 19 Oct 2007

See all articles by Michael Ehrmann

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Refet S. Gürkaynak

Bilkent University - Department of Economics

Eric T. Swanson

University of California, Irvine - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: October 2007

Abstract

We study the convergence of European bond markets and the anchoring of inflation expectations in euro area countries using high-frequency bond yield data for France, Germany, Italy and Spain. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic data announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which since monetary union have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, the reaction of far-ahead forward interest rates to macroeconomic announcements has converged substantially across euro area countries and even been eliminated over time, thus underlining not only market integration but also the credibility that financial markets attach to monetary policy in the euro area.

Keywords: bond markets, euro area, EMU, convergence, anchoring, credibility, monetary policy

JEL Classification: E52, E58

Suggested Citation

Ehrmann, Michael and Fratzscher, Marcel and Gürkaynak, Refet S. and Swanson, Eric T., Convergence and Anchoring of Yield Curves in the Euro Area (October 2007). ECB Working Paper No. 817, Available at SSRN: https://ssrn.com/abstract=1015268

Michael Ehrmann (Contact Author)

European Central Bank (ECB) ( email )

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Marcel Fratzscher

DIW Berlin ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

Refet S. Gürkaynak

Bilkent University - Department of Economics ( email )

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Turkey

Eric T. Swanson

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
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Irvine, CA 92697-5100
United States
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