Title: Testing the shape of EMU term structure of interest rates

Authors: Elisabet Ruiz-Dotras, Catalina Bolance-Losilla, Hortensia Fontanals-Albiol

Addresses: Department of Business and Economy, Open University of Catalonia, Av. Tibidabo, 39-41, Barcelona, 08035, Spain. ' Department of Econometrics, University of Barcelona, Av. Diagonal, 690-696, Barcelona, 08034, Spain. ' Department of Economic, Financial and Actuarial Mathematics, University of Barcelona, Av. Diagonal, 690-696, Barcelona, 08034, Spain

Abstract: The creation of EMU raises the question whether the common monetary policy has the same impact in all member countries. We analyse the convergence of interest rates in four major EMU countries from 1999 to 2007. We suggest to test the convergence of the interest rates with the full term structure of interest rates with both univariate and multivariate inference. The results show that the curvature component is statistically equal in all years and the level and slope components are statistically equal only in the early years of the EMU if we consider the four countries. If we consider Germany, France and Spain, the level and slope factors are statistically equal in all the sample period. In conclusion, a unique monetary policy affects mainly in the curvature of the term structure but it is not enough to ensure a unique yield curve in the Euro area.

Keywords: convergence; EMU; Economic and Monetary Union; European Union; EU; term structures; interest rates; monetary policy; univariate inference; multivariate inference; curvature components; level components; slope components; statistical factors; yield curves; Euro area; Eurozone; currencies; money; Germany; France; Spain; Italy; financial markets; applied financial economics.

DOI: 10.1504/IJFMD.2010.035767

International Journal of Financial Markets and Derivatives, 2010 Vol.1 No.4, pp.422 - 437

Published online: 03 Oct 2010 *

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