Integration of LIBOR and Treasury bill yields over different monetary regimes

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In this paper, tests are conducted for cointegration and Granger-causality relationships between monthly yields on 90-day maturities for London Interbank Borrowing Rate (LIBOR) and Treasury bills (T-bills). Unlike prior studies, there is no evidence of increased integration between LIBOR and T-bill yields over time. Findings in this study suggest that tests of integration of global dollar markets are sensitive to sample periods and different monetary regimes. Integration relationships are strongest under interest rate target regimes and weakest under non-borrowed reserve regimes, as predicted. Under the current regime of borrowed reserve targets, a hybrid of money supply and interest rate targeting, LIBOR and T-bill yields are integrated to a lesser extent than under interest rate target regimes prior to 1979.