Interest Rate Convergence Research Articles

Convergence Trends in Euro Economies: Financial Crisis Recovery and the COVID-19 Pandemic

The configurative comparative method, Dynamic Pattern Synthesis (DPS) is used to replicate previous research into the impact of the euro on economic convergence. The DPS method ensures a forensic examination of the diverse variable patterns that influence cluster memberships. As with previous research conclusions, there are multiple patterns of convergence and divergence. Consistent clusters across the time periods compared are Germany, the Netherlands, Luxembourg, and Ireland; Slovakia and Estonia; Italy, Spain, and Slovenia; and Portugal and Greece. The variable patterns most likely to influence cluster definitions are differences in GDP per capita, productivity, and investment, although there are other differing variable patterns that influence specific smaller cluster memberships and the consistency of memberships over time. Externalities undermine nominal convergence. An example is the divergence of the experience of consumer inflation between 2016 and 2022. Nevertheless, some convergence in long-term interest rates is achieved. There is also divergence in the real convergence target of GDP per capita. As regards structural changes, productivity differences widen, and investment as a percentage of GDP converges during COVID-19. The theoretical implications are that the complex dynamics between collaboration, competitive markets, and global instabilities makes convergence unlikely. Real convergence, such as reducing the distribution differences of GDP per capita, is only likely to be possible over many decades, and needs considerable government interventions. Complex systems theory informs us that limits to convergence are inevitable in dynamic systems where events bring unplanned divergences.

Revisiting the debate on the Eurozone crisis: causes, clustering periphery and core, and the role of interest rate convergence

ABSTRACT Explaining the Eurozone crisis requires explaining the origins of the external imbalances until then. The paper divides the literature arguments into three ”fundamental causes”, not mutually exclusive: a competitiveness problem, North-South flows, and excess of public and/or private spending. Within each of these causes, we find divergences between authors in the literature and identify a set of variables correlated with the accumulation of external imbalances before the crisis. These variables help to create clusters of Eurozone countries and separate core countries from the periphery. We then develop an original argument, that the convergence of nominal long-term interest rates in the periphery cluster countries, relative to the core cluster countries, between 1996 and 2007, was the trigger for the three ”fundamental causes” mentioned. We find Granger-causality between this convergence and subsequent (after four quarters) annual variations in the quarterly current account balance.

Twenty years with the Euro: Eurozone banking market integration revisited

Banking market integration is essential for a stable European Monetary Union but was severely disrupted during the Eurozone crisis. With heterogeneous national banking markets, interpreting the recent post-crisis convergence of national interest rates as restored integration has been challenged in the literature. We therefore scrutinize integration under the condition of market heterogeneity for 12 Eurozone countries before, during and after the Eurozone crisis from 2003 to 2019, employing a novel combination of state-of-the-art network analyses and estimates of bilateral interest rate linkages. We measure integration as bi-directional (Granger) causality relations between lending rates or margins in order to identify crisis-resilient arbitrage mechanisms. Their extent, disruption and restoration inform our subsequent network analysis, which unveils that the Eurozone crisis has fundamentally and persistently disrupted this network beyond the crisis period even when interest rates and margins are converging. Our approach complements and extends existing integration analyses by revealing policy-relevant but otherwise undetected disintegration.

Financial Developments in London in the Seventeenth Century: The Financial Revolution Revisited

A novel series of interest rates paid by the Corporation of London shows that interest rates in London declined by 350 basis points during the seventeenth century. The decline followed a similar pattern in Europe. Records from the Corporation’s archive provide evidence for financial development: an increase in the number and volume of debt instruments, an increase in the number of lenders, and the development of a secondary market. Econometric analysis establishes that increasing the debt instruments’ liquidity contributed to the convergence of interest rates between London and Amsterdam.

Globalization, long memory, and real interest rate convergence: a historical perspective.

This paper investigates whether the real interest rate parity (RIRP) is valid during the three waves of globalizations that occurred in the last 150 years (1870–1914, 1944–1971, 1989 to the present). If any, these periods should favor RIRP, since globalization is a process where economies and financial markets become increasingly integrated into a global economic system. In contrast to the existing literature, we model the departures from RIRP as a long-term memory process and apply fractional integration methods on a sample of real interest rate differentials of seven developed countries: France, Germany, Holland, Italy, Japan, Spain, and the UK across the three globalization waves paired against the USA. We compute impulse response functions (IRF) to gain further insight into the memory characteristics of the RIRP differential processes and provide half-life estimates. We find that deviations from RIRP are mean reverting, providing robust evidence of real interest rate convergence during the three globalization waves. We shed further light on financial and commodity market integration during the three globalization waves by assessing the memory properties of uncovered interest rate parity (UIP) and relative purchasing power parity (PPP) differential processes. We find that deviations from relative PPP and UIP are not always mean-reverting processes. RIRP, relative PPP, and UIP hold simultaneously only in 7 out of 21 cases; RIRP and UIP hold in 11 out of 21 cases; RIRP hold without the support of relative PPP and UIP in 3 out of 21 cases. Thus, the evidence in favor of real interest rate convergence appears to be driven more by UIP than relative PPP. All these results are, to the authors knowledge, new to the literature.

Revisiting the Debate on the Eurozone Crisis: Causes, Clustering Periphery and Core, and the Role of Interest Rate Convergence

Revisiting the Debate on the Eurozone Crisis: Causes, Clustering Periphery and Core, and the Role of Interest Rate Convergence

Monetary Policy Convergence within the EAC: A Focus on Interest Rate and Exchange Rate

This study was conducted to establish whether the key variables in monetary policy transmission mechanisms are converging within the East African Community. This region is eyeing having an economic union and subsequently a monetary union hence the significance of investing developments in the monetary sector. The analysis used panel data from the year 2005 to 2020 for five EACs. To test for convergence of interest rates and exchange rates, the analysis employed; unit-root test, sigma convergence, co-integration tests, and finally used the panel fixed effect model to establish the impact of the two variables on the GDP. The analysis shows that in the short run, there is no convergence in interest rates but there is convergence in exchange rates. However, in the long run, the two monetary policy variables are co-integrated indicating that the region is doing well in terms of integration in the financial sector in their preparation to form a common trade area and monetary union. The analysis of the impact of the two variables on economic growth shows that only the exchange rate is significant, therefore, the region should strive to foster a stable exchange rate regime to realize increased economic growth.

Real interest rate convergence and monetary policy independence in CEE countries

In this paper we provide new empirical evidence relevant for discussions on monetary policy independence in the context of euro adoption in three Central and Eastern European (CEE) countries: Czechia, Hungary and Poland. Unlike many other authors, in this paper we focus on real and not nominal interest rates as real interest rates are at the hearth of modern macroeconomic and monetary policy theory. In the paper we employ several methodologies to test the convergence of real interest rates between these countries and the euro area and to determine the main drivers of real interest rates. Based on the unit root analysis we find evidence of convergence of real interest rates in these countries, thus confirming the real interest rate parity (RIRP) hypothesis. Next, using principle component analysis (PCA) we show that common factor extracted from the sample of CEE countries and individual euro area countries can explain high proportion of real interest rate developments in these countries. Finally, results of our newly proposed analytical framework for the analysis of determinants of real interest rates in small open economies, based on a Bayesian VAR model with block exogeneity, show that external shocks have non-negligible effect on real interest rate developments in selected CEE countries. Thus, our results indicate that real interest rates in CEE depend on factors that are beyond the scope of domestic monetary policy makers. In this sense we can conclude that (conventional) monetary policy independence in these countries is limited. Thus, we see the loss of monetary policy independence as overly emphasized argument in discussions on the euro adoption in these countries. However, we are aware that national central banks in CEE started to rely more on non-conventional measures recently, which gives them a higher degree of flexibility (and autonomy).

Approaching Monetary Integration in the Context of the Imperative to Ensure the Sustainable Growth in the EU

Sustainable economic growth is an essential objective at the European Union level. The purpose of this paper is to investigate the impact of monetary integration on economic growth, assuming that the introduction of the euro significantly stimulated the process of European financial integration. We used a fixed-effects methodology for panel data for the EU 28 countries for the period 2004–2018. We find that the main factors through which monetary integration contributessignificantly and positively to economic growth areeconomic growth Single Euro Payments Area (SEPA)cards, trade, monetary freedom, convergence of interest rates, convergence of exchange rates and cross-border holdings of short-term debt, with significant differences between Eurozone and non-euro countries, which confirms the hypothesis that the introduction of the euro had a significant impact on economic and financial integration.

European Banking Integration and Sustainable Economic Growth

Sustainable economic growth is considered a fundamental problem due to the effects that can be felt on the society as a whole, along with the phenomenon of banking integration that can influence the development of a country’s economy. This research aims to investigate the impact of banking market integration on sustainable economic growth in EU countries, especially in the context of financial integration, a good consolidation of the banking market is needed. We also identified the main factors by which the development of the banking market influences economic growth. The analysis was carried out for the period 2004–2018 in EU countries as a sample. According to the results obtained, we can say that European banking integration has a positive influence and has many benefits on the growth and sustainable development of the economy. The main factors by which banking integration significantly and positively favors economic growth are convergence of asset returns, convergence of interest rates, cross-border lending to the non-banking sector, foreign assets and foreign liabilities), the ratio of international banking activities, the ratio between assets and GDP, and the net interest margin (only when maintaining a low level) with some differences between the pre-crisis and the post-crisis period, the countries in the Euro Zone outside the euro, and the new EU member states and the old EU member states.

Convergence of retail banking interest rates to households in euro area: time-varying measurement and determinants

This study measures time-varying progress of retail banking (to households) interest rates convergence and examines its determinants for twelve countries of the euro area, between 2003 and 2014. First, we measure convergence of interest rates using five different time-varying indicators, namely asymmetric dynamic conditional correlation (ADCC), beta convergence, sigma convergence, variance ratio, and dynamic cointegration. We then estimate panel regressions for each type of interest rate to identify the determinants of convergence over pre-crisis and crisis periods. The estimated ADCC is employed as the dependent variable and explanatory variables measure potential macroeconomic, external linkages, industry-specific, institutional and sociological determinants. The results reveal that convergence is weak and heterogeneous across sub-periods (pre-crisis and crisis), economic groups (core and periphery), product type (savings and credit) and products’ maturities (short, medium and long). Among the fundamental determinants, inflation, output correlation, and sociological factors strongly impact convergence, however, the explanatory power of determinants weakens during the crisis period.

SMEs’ growth under financing constraints and banking markets integration in the euro area

ABSTRACT We explore the impact of financing constraints and the role of banking markets integration on the growth of small and medium enterprises (SMEs). The data are drawn from the European Central Bank/Survey on the Access to Finance of Enterprises (ECB/SAFE) on SMEs’ access to finance aggregated at the country level for the largest 11 euro area countries during 2009–2015. Our findings suggest that financing constraints hamper SMEs’ growth and that the effect is stronger for perceived, rather than actual, financing constraints. On the other hand, increased banking markets integration in the euro area appears to foster SMEs’ growth. Furthermore, we found that the reduction in financing constraints is crucial in the transmission channel from banking markets integration to growth. This effect appears significantly stronger when integration is measured by the intensity of cross-border lending than through convergence in interest rates to loans to nonfinancial corporations.

On real interest rate convergence among G7 countries

I analyze real interest rate convergence among six industrialized countries in 1975M1–2011M3 within a multi-country framework by means of a dynamic latent factor model. This approach makes it possible to examine common trending behavior and common transitory movements in the real interest rates. Time-varying variances of the components allow for gradual endogenous transition from a high variance regime toward a low variance regime. The estimation results suggest that four permanent and four transitory components capture the real interest rate dynamics among the sample of G7 countries at the beginning of the sample period. The common components’ variances mostly decline over time, and in part even converge to values close to zero. This indicates a reduction in the number of stochastic factors, which in turn can be interpreted as confirmation of the convergence hypothesis of less cross-country dispersion over time. I observe rapid convergence during the late 1970s and 1980s, followed by slower transition since the beginning of the 1990s when financial markets had already been highly integrated.

Interest rate convergence across maturities: Evidence from bank data in an emerging market economy

Against a background of financial liberalisation reforms, we assess the extent of market integration and competition in Colombian retail deposits and loans markets. We employ a dataset comprising bank-level interest rate data for different financial products across a range of banks. We utilise and further develop the Phillips and Sul convergence club approach by estimating the drivers of club formation. We find integration of the deposits market, but not loans where portfolio riskiness and loan maturity explain why there is not a fully integrated market. Also, the degree of loan market convergence responds asymmetrically to changes in monetary policy.

Government bond yields in Germany and Spain—empirical evidence from better days

This paper tries to link the uncovered interest rate parity condition to the discussion about interest rate convergence in currency unions. Techniques of fractional cointegration analysis are used to examine the relationship between German and Spanish government bond yields with maturities of two, five, seven and ten years in the period 05 January 2001 to 29 December 2006. Back then (in the good times of the currency union) financial markets did not have to fear exchange rate risk and sovereign credit risk. Thus, the risk premia to be observed were small and driven by liquidity risk. Economic theory suggests that a cointegration vector of between the interest rates can only exist when markets do not expect exchange rate movements and the risk premium is not interest rate sensitive (or practically speaking the sensitivity is low). Given the data set examined here, it is probably no surprise that the interest rates of the two countries are cointegrated and that the cointegration vector of German and Spanish government bond yields with maturities of two, five and seven years seems to be . We then have also examined the degree of interest rate sensitivity of the yield spread between Spain and Germany. The differential between the yields of the two countries in all maturity brackets do not react to the level of interest rates in the currency union. This fits perfectly to our results with regard to the cointegration vector.

Economic Convergence in the Euro Area: Coming Together or Drifting Apart?

We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.

Economic Convergence in the Euro Area: Coming Together or Drifting Apart?

We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.

Interest rate convergence, sovereign credit risk and the European debt crisis: a survey

PurposeThis paper aims to briefly review the literature on interest rate convergence and the European debt crisis with a special focus on the current fiscal problems of some governments in Europe.Design/methodology/approachRelevant empirical papers are identified and reviewed focusing on time series analysis techniques.FindingsThe introduction of the euro has caused interest rate convergence among European Monetary Union (EMU) government bond yields. However, now sovereign credit risk and possibly even redenomination risk have caused divergences in European bond markets.Research limitations/implicationsA major limitation is that a relatively new field of the literature is surveyed. However, there are enough papers of relevance. This review paper could therefore be helpful in finding new approaches for additional empirical research examining the EMU bond market.Originality/valueThe results of empirical studies in a relatively new field of the literature are summarized. There meanwhile are some relevant papers. A brief survey of the results of these papers is provided. Important empirical findings with regard to interest rate convergence, sovereign credit risk and redenomination risk in the EMU are discussed and evaluated. The review is especially helpful for researchers and practitioners in the field of managerial finance and risk managers in the financial services industry.

Euro area macroeconomic imbalances and their asymmetric reversal: the link between financial integration and income inequality

This paper explores the impact of the Economic and Monetary Union (EMU) and the ensuing financial integration on Euro Area (EA) macroeconomic imbalances. It is found that EMU caused an exceptional deterioration of current account positions in relatively unequal EA countries more than in the others. The explanation provided is that the large increase in money supply following the abolition of capital controls in 1990, of exchange rate risks in 1999 and the parallel softening of domestic credit market regulation throughout the 1990s that lead to downwards interest rate convergence had the effect of relaxing collateral constraints specifically for lower-income households, whose share is found to rise with levels of income inequality. Optimistic expectations about future income led to over-borrowing by these groups. Consequently, current account reversal was asymmetric because the crisis forced indebted lower-income (unskilled) households to abruptly reduce consumption, as they were the first to be pulled out of the labour market and hardly had financial buffers. The hypothesis is tested using a difference-in-difference approach to panel data.

Real Interest Rate Parity in the Northeast Asian Countries: Evidence from the Quantile Unit Root Test

The main purpose of examining real interest rate parity (RIRP), focus on explore more evidence from the quantile unit root test. This study applies the Quantile unit root test to assess the validity of the RIRP for Northeast Asian countries (including Russia, Mongolia, Mainland of China, South Korea and Japan) relative to the USA. In this paper, I examine the validity of RIRP from the nonlinear point of view and evidence obviously indicates that RIRP holds true for two countries. It implies that the operations and effectiveness of the monetary policies in these countries will be highly influenced by the exterior factors originating from the USA. At the same time, my results point out their real interest rate convergence relative to the USA is mean reversion towards RIRP equilibrium values in a nonlinear way.The time series of all the countries from ADF and PP tests are non-stationary. By contrast, the KPSS tests with constant reject the stationary for all countries. According to QKS, RIRP of Japan and Russia are affected by USA. Meanwhile, China, South Korea and Mongolia do not support RIRP. Furthermore, central bank of China, South Korea and Mongolia could be pursue their independent monetary policies means that central bank does not follow market mechanism.In this paper focus on those countries that uses the macroeconomic variables includes consumer price index (CPI), inflation rate (INF), nominal interest rate (NIR), real interest rate (RIR) and real interest rate parity (RIRP). The data are collected at monthly started period for these countries are different cause the data availability, and the end of the sample is 2015M12 for all countries.