Linkages among interest rates in the United States, Germany and Norway

Revised version of SNF report no. 77/97The Johansen multivariate cointegration methodology is utilized to analyze relationships among short-term and long-term interest rates in the United States, Germany and Norway. A variance decomposition approach is applied to estimate the proportion of each interest rate’s forecast error variance attributable to innovations in the other interest rates. Impulse response functions are plotted to illustrate the speed with which interest rates events are transmitted between capital markets. The analyses illustrate that US interest rates have a significant influence on both German and Norwegian interest rates, while the reverse effect is modest. Norway is also strongly exposed to German interest rates movements, which illustrates the consequences of a small country linking its currency to the value of European currencies