2000), "Interest rates linkages: identifying structural relations

This paper examines the causal linkages which may exist between the G-7 national interest rates. Its aim is to exploit some new techniques in cointegration analysis to see to what extent conclusions can be drawn purely from the data without imposing any arbitrary identification conditions. Causality is intimately linked with our structural view of the economy, and it has not been practical in a traditional setting to go very much beyond the standard Granger causality testing procedures. This paper examines linkages between I(1) series as structural relations, using a method put forward by Davidson (1998a) that involves the introduction of the new concept of an irreducible cointegrating vector. In order to distinguish between structural and solved irreducible cointegrating relations, we extend this methodology introducing the ranking of irreducible cointegrating vectors according to a minimum variance criterion. The results suggest that over our sample period the US has been the dominant player in setting world interest rates; they also allow us to reject the hypothesis of a German leadership in Europe in favour of a US world-wide leadership