Monetary Policy Implications of Comovements Among Long-Term Interest Rates

Abstract

This paper examines the monetary policy implications from the greater integration of major capital markets using long-term interest rates. Proof that globalization has affected the behavior of interest rates and made them more synchronized across countries is provided from the way disturbances in a market transmit to other markets thereby affecting the conduct of monetary policy in all involved parties. The results also confirm greater convergence among countries in the European Union as Germany still retains its hegemonic status. The implications for monetary policy are that countries now will have to deal with more outside shocks and these shocks will be more diverse, intense and persistent. Thus, global monetary policy, at least among the major capital markets, henceforth will have to be played interactively, which may necessitate a greater financial supervision in order to ensure continued world stability and prosperity.

Keywords: interest rates, VAR, monetary policy

JEL Classification: F42, G15, C32