Investigating financial integration using an ex ante real interest rate

What is it about?

Short-run and long-run dynamic linkages among weekly real interest rates for G-10 countries are examined using a variety of time-series tests. These tests give special attention to the time-series properties of nominal interest rates, ex-ante expected rates of inflation and real interest rates. Term structure information is used to recover a theoretically consistent measure of ex-ante expected inflation. In-sample and out-of-sample Granger causality tests are also examined to evaluate leadrlag relationships among real interest rates. The results provide strong support for well-integrated markets, particularly in the long run. The results imply leadership roles for the US in international asset markets.

Featured Image

Why is it important?

Using the ex ante real interest rate measure that has not previously been applied in the literature.