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Long‐term nominal interest rates and domestic fundamentals

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  • Guglielmo Maria Caporale
  • Geoffrey Williams

Abstract

This paper investigates the information content of domestic macroeconomic developments for the determination of nominal long‐term interest rates in the G7. We show that when an econometric methodology is followed, which takes into account the stationarity, cointegration, and exogeneity features of the data, well‐specified equations can be estimated, which confirm the importance of fiscal and monetary developments in the determination of long‐term interest rates. The results are contrary to those that one would expect from standard finance theory, which suggests that interest rates are determined by market participants. They reveal that inflation uncertainty and the quality of debt are important factors in each of the countries considered. In addition, there is a high degree of uniformity in the structure of the estimated relationships, suggesting that economic performance is of greater importance than institutional diversity in the determination of long‐term rates.

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  • Guglielmo Maria Caporale & Geoffrey Williams, 2002. "Long‐term nominal interest rates and domestic fundamentals," Review of Financial Economics, John Wiley & Sons, vol. 11(2), pages 119-130.
    • Handle: RePEc:wly:revfec:v:11:y:2002:i:2:p:119-130
    DOI: 10.1016/S1058-3300(02)00038-1
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