Dynamic Linkages Among Long-Term Interest Rates: Implications for Global Monetary Policy

Abstract

This paper examines the implications from the greater integration of major capital markets using long-term interest rates. The empirical approach is a Vector Autoregression which examines the nature of the monetary spillover mechanism across eight markets namely, Canada, France, Germany, Japan, the Netherlands, Switzerland, the U.K. and the U.S. Proof that globalization has seriously 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. These are usually fast and persistent and affect the conduct of monetary policy in all involved parties. Further, the empirical results confirm greater convergence among countries in the European Union as Germany still retains its hegemonic status. The implications for monetary policy are that countries may now have to deal with more shocks coming from abroad and these shocks will be diverse, intense and persistent. Thus, global monetary policy, at least among the major capital markets, will have to be played interactively from now on which may suggest that greater financial supervision and regulation might be needed in order to ensure continued world stability and prosperity.

Keywords: VAR, interest rates, globalization, monetary policy, innovations

JEL Classification: E41, F41