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July/August 1988, 
Vol. 70, No. 4
Posted 1988-07-01

International Linkages in the Term Structure of Interest Rates

by Clemens J.M. Kool and John A. Tatom

Clemens J. M. Kool and John A. Tatom use this approach to study the relationship of short- and long-term interest rates for five countries: the United States, Canada, the United Kingdom, West Germany, and Japan. Kool and Tatom explain the theoretical basis for expecting interest rates to be connected across countries. They show that long-term rates have been closely related among the five countries, while short-term rates have not. This finding raises a serious challenge to the term-structure view. The authors point out that the influence of changes in foreign short-term rates on both domestic short- and long-term rates could show up initially only in the latter rate. They find some evidence that changes in U.S. short-term rates have had a statistically significant influence on long-term rates in Canada, Japan, and West Germany, but that changes in one-month interest rates elsewhere are not significant. The relationship from the United States to other countries is not robust either. Kool and Tatom conclude that the term structure is not a reliable mechanism connecting interest rates across countries. Instead, they suggest that changes in international long-term rates are related directly and quickly because of relatively common inflation rates and real interest rate developments.

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