The international linkage of real interest rates: The European-US connection

Abstract

In this paper we present evidence on several questions regarding the movement in short term real interest rates in eight countries: Have ex ante real estates in the United States and Europe been high during recent years? Has there been a link between US real rates and those in other countries? Can this link be quantified? The basic finding in this paper is that real rates have climbed dramatically from the 1970s to the 1980s in both the European countries and the United States. There is also strong evidence that there is a positive association between movements in US real rates and those in Europe. However, European real rates typically do not move one-for-one with US real rates, still leaving open the possibility that European monetary policy can influence domestic economic activity.