19 Dec 2014
Keep it real: the interdependence between the Fed and the ECB – Rabobank
FXStreet (Barcelona) - The Rabobank Team explains that the correlation between US and German bond yields may give the Fed and the ECB the ability to drive US and German government bond yields.
Key Quotes
“While US and German government bond yields are highly correlated, we do not find evidence that they are cointegrated. This suggests that the Fed and the ECB should be able to follow divergent monetary policies indefinitely. However, we do find evidence of cointegration between real German and US interest rates. This means that while the Fed and the ECB may be able to drive US and German government bond yields into separate ways, inflation differentials will push real interest rates back together.”
“Our result can be interpreted as evidence of a long run version of the real interest rate parity hypothesis. The implication is that the Fed may end up providing more monetary stimulus to the economy than intended and the ECB less.”
Key Quotes
“While US and German government bond yields are highly correlated, we do not find evidence that they are cointegrated. This suggests that the Fed and the ECB should be able to follow divergent monetary policies indefinitely. However, we do find evidence of cointegration between real German and US interest rates. This means that while the Fed and the ECB may be able to drive US and German government bond yields into separate ways, inflation differentials will push real interest rates back together.”
“Our result can be interpreted as evidence of a long run version of the real interest rate parity hypothesis. The implication is that the Fed may end up providing more monetary stimulus to the economy than intended and the ECB less.”