Central Bank Policy Rates: Are They Cointegrated?

20 Pages Posted: 17 Mar 2017

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Hector Carcel

University of Navarra - School of Economics

Luis A. Gil-Alana

University of Navarra - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2017

Abstract

This paper analyses the stochastic properties of and the bilateral linkages between the central bank policy rates of the US, the Eurozone, Australia, Canada, Japan and the UK using fractional integration and cointegration techniques respectively. The univariate analysis suggests a high degree of persistence in all cases: the fractional integration parameter d is estimated to be above 1, ranging from 1.26 (US) to 1.48 (UK), with the single exception of Japan, for which the unit root null cannot be rejected. Concerning the bivariate results, Australian interest rates are found to be cointegrated with the Eurozone and UK ones, Canadian rates with the UK and US ones, and Japanese rates with the UK ones. The increasing degree of integration of international financial markets and the coordinated monetary policy responses following the global financial crisis might both account for such linkages.

Keywords: Interest Rates, long memory, fractional integration and cointegration

JEL Classification: C22, C32, E47

Suggested Citation

Caporale, Guglielmo Maria and Carcel, Hector and Gil-Alana, Luis A., Central Bank Policy Rates: Are They Cointegrated? (March 2017). DIW Berlin Discussion Paper No. 1648, Available at SSRN: https://ssrn.com/abstract=2934278 or http://dx.doi.org/10.2139/ssrn.2934278

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Hector Carcel

University of Navarra - School of Economics ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

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