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An empirical analysis of the German long-term interest rate

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  • Frank A. G. Den Butter
  • Pieter Jansen

Abstract

The short run and long run influences of the main determinants of the German long-term interest rate are estimated using quarterly data for the period 1982-2001. A major reason for the focus on the German interest rate is that this rate, and hence its determinants, will be dominant in explaining the developments of the long-term Euro-rate in the international capital market. The specification of the interest rate equation encompasses various theories on interest rate formation. Four of the analysed interest rate theories partially explain interest rate movement, and therefore together form an encompassing model in which the four theories are incorporated. The short-term German interest rate, the US and Japanese bond rates and the government balance appear to be the most prominent determinants of the German (and hence Euro) rate, but also the business cycle and the oil price have explanatory power of this interest rate.

Suggested Citation

  • Frank A. G. Den Butter & Pieter Jansen, 2004. "An empirical analysis of the German long-term interest rate," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 731-741.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:10:p:731-741
    DOI: 10.1080/0960310042000243565
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    References listed on IDEAS

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    Cited by:

    1. Frank A. G. den Butter & Pieter W. Jansen, 2013. "Beating the random walk: a performance assessment of long-term interest rate forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 23(9), pages 749-765, May.
    2. Aswani Kumar Mallick & Alok Kumar Mishra, 2019. "Interest rates forecasting and stress testing in India: a PCA-ARIMA approach," Palgrave Communications, Palgrave Macmillan, vol. 5(1), pages 1-17, December.
    3. Jansen, Pieter W., 2006. "Did capital market convergence lower the effectiveness of the interest rate as a monetary policy tool?," Serie Research Memoranda 0010, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    4. Reid Dorsey-Palmateer & Gary Smith, 2007. "Shrunken interest rate forecasts are better forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 425-430.
    5. Jansen, Pieter W., 2006. "Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low," Serie Research Memoranda 0011, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.

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