International linkages between short-term real interest rates

Abstract

Whereas previous studies have focused on the causal relation between nominal interest rates, this paper examines causal relationships between real rates for the United States and six other countries. Based on evidence from our full sample we find that U.S. and foreign interest rates are not highly informative for one another. This would suggest that even if the United States is regarded as a large player in international financial markets this does not necessarily translate into the transmission of U.S. real interest rates to other countries. However, an examination of various sub-periods of our sample reveals that this conclusion may be sensitive to the U.S. monetary policy regime. We also report results for linkages between European countries which indicate that Germany provides some information on real interest rates in France and the United Kingdom, but not in Italy. An analysis of various sub-periods for the European countries show that the result for France is not robust, with German rates having an impact only in the first period through March 1983. This latter evidence does not provide strong support for the hypothesis that Germany's monetary policy plays a dominant role in the European Monetary System. In general, we would argue that domestic factors play a prominent role in determining real interest rates, quite independently from the influence of interest rates from abroad.