Interest Rates Linkages for G-6 Countries

AuthorCelik S., Kaya H.
Pages189-200
Bulletin of the Transilvania University of Braşov
Series V: Economic Sciences • Vol. 9 (58) No. 1 - 2016
Interest rates linkages for G-6 countries
Sadullah ÇELİK1, Hüseyin KAYA2
Abstract: This study examines the long-run, medium-run and short run interest rates
linkages among G-6 countries from 1991 till 2009. We use several conventional and
unconventional techniques such as cointegration, codependence and wavelet comovemen t.
Our results show that 19 out of 45 pairs are cointegrated and 11 of them have cointegration
relation with a structural break. Existence of cointegration relation implies that only 19
pairs have common stochastic trend. On the other hand, using codependence, we find that 15
out of 19 pairs both have common stochastic trend and common cycles and 23 pairs have
only common cycles. In total 38 out of 45 pairs have common cycles. In terms of the Rua
(2010) wavelet comovement methodology, our results are in line with the argument that the
comovement was dependent on the US at every frequency.
Key-words: Interest rates, G-6 countries, codependence, wavelet comovement
1. Introduction and motivation
Relations between interest rates among countries are an important aspect of
understanding international financial linkages and constructing financial and
economic models. The idea of existence of interest rate linkages across countries
usually arise from the interest rate parity condition which builds a connection
between two countries’ interest rates via integration of the foreign exchange market.
Hence, a high degree of international capital mobility between two countries leads to
financial assets of these countries being substitutes for each other and arbitrage
opportunities should equalize one country’s interest rate with other one plus the
forward premium on the two currencies. As a consequence, if forward premium has
stationary time series properties then the two interest rates may move together over
time (Zhou, 2003). To the best of our knowledge this study is the first attempt that
investigates short, medium and long term interest rates linkages among the
developed countries of United States, United Kingdom, Germany, Italy, France and
Canada. We exclude Japan because especially during 1990s Japan suffered from
liquidity trap and we thought that it deserves a special interest. We hope to obtain
1 Marmara University, Istanbul, Turkey, e-mail: scelik@marmara.edu.tr
2 İstanbul Medeniyet University, Turkey,

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