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Real interest rates linkages between the USA and the UK in the postwar period

Author

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  • Angelos Kanas

    (Department of Economics, University of Crete, and Regional Analysis Division, FORTH, Greece)

  • Georgios Tsiotas

    (Department of Economics, University of Crete, and Regional Analysis Division, FORTH, Greece)

Abstract

This paper addresses the issue of real interest rate linkages between the UK and the USA during the postwar period. We use a bivariate Markov switching vector error correction model, which accounts for both the regime switches in the real interest rates and their long-run cointegration properties over that period. We find strong evidence of two volatility regimes, namely a high-volatility and a low-volatility regime, jointly characterizing the US and the UK real interest rates. Evidence is found of high-volatility regime dependence between the two real interest rates. In addition, there is evidence of regime-dependent Granger causality: the US real interest rate Granger causes the UK only in the regime of high volatility. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Angelos Kanas & Georgios Tsiotas, 2005. "Real interest rates linkages between the USA and the UK in the postwar period," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 251-262.
    • Handle: RePEc:ijf:ijfiec:v:10:y:2005:i:3:p:251-262
    DOI: 10.1002/ijfe.271
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