Accessibility tools
Service tools
Language
Navigation path
Author(s): Carlo Favero and Francesco Giavazzi (IGIER-Univeristà Bocconi and CEPR; IGIER-Università Bocconi, MIT, CEPR and NBER)
The ECB and the bond market - Carlo Favero and Francesco Giavazzi (2 MB)
Despite the fact that the correlation between policy rates in the U.S. and
in the euro area has been low—at least over the past three decades—long term
interest rates in the two regions have been highly correlated. More recently
(since the early 1990s) their levels have also converged. Decomposing
long-rates in their underlying factors–real rates (plus an inflation risk
premium), term premia, expected monetary policy and expected inflation—we find
that this convergence reflects more similar economic structures in the U.S. and
in the euro area, rather than a change in the distribution of shocks that hit
the two regions. As far as the response to shocks is concerned, since the start
of EMU Euro area long rates have become more responsive to local non-monetary
shocks: in the long run, however, they converge to the same level of U.S. long
rates because expected inflation and expected monetary policy also converge to
similar levels. Policy rates in the euro area have also become more responsive
to local non-monetary shocks. Finally, since the start of EMU, a monetary
tightening by the ECB raises long rates, contrary to what used to happen in the
1990s when the Bundesbank was running monetary policy. Interestingly long rates
in the Euro area fall following a monetary tightening in the U.S.
JEL classification E27, E37, E43
doi: 10.2765/58460
KC-AI-08-314-EN-C (online) | |
ISBN 978-92-79-08239-9 (online) | |
ISSN 1725-3187 (online) | |
Additional tools