Convergence and Anchoring of Yield Curves in the Euro Area Conference on International Financial Integration Federal Reserve Bank of Atlanta November 30, 2007 Michael Ehrmann European Central Bank Note: The views expressed in this presentation are the authors’ and do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or the European Central Bank. Marcel Fratzscher European Central Bank Refet Gürkaynak Bilkent University Eric T. Swanson Federal Reserve Bank of San Francisco
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Convergence and Anchoring of Yield Curves in the Euro Area
Convergence and Anchoring of Yield Curves in the Euro Area. Michael Ehrmann European Central Bank. Marcel Fratzscher European Central Bank. Eric T. Swanson Federal Reserve Bank of San Francisco. Refet G ü rkaynak Bilkent University. Conference on International Financial Integration - PowerPoint PPT Presentation
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Convergence and Anchoring of Yield Curves in the Euro Area
Conference on International Financial IntegrationFederal Reserve Bank of Atlanta
November 30, 2007
Michael EhrmannEuropean Central Bank
Note: The views expressed in this presentation are the authors’ and do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or the European Central Bank.
Marcel FratzscherEuropean Central Bank
Refet GürkaynakBilkent University
Eric T. SwansonFederal Reserve Bank of San Francisco
Feb 1992: Maastricht Treaty signed
Sep 1992: ERM crisis, several countries abandon exchange rate pegs
May 1998: Countries eligible for EMU are announced
Jan 1, 1999: Exchange rates irrevocably fixed, European Central Bank established, financial institutions adopt euro
Jan 1, 2002: Euro adoption completed, currency issued
European Monetary Union: Background
Two related issues:• Convergence of sovereign bond yields (market integration)• Convergence and anchoring of inflation expectations
Despite unified monetary policy, convergence in these respects is not clear:
• Bond market unification:• Default risk varies across sovereign governments• Liquidity varies across bond issues
• Long-term inflation expectations:• There may be probability of exit from EMU
Overview of the Paper
Three metrics for assessing convergence:• Yield levels• Yield volatility• Yield sensitivity to news (conditional volatility)
Focus on daily frequency bond market data• More stringent test of convergence/unification/anchoring
Two types of yields:• Medium- and long-term yields (bond market integration)• Far-ahead forward interest rates (inflation expectations)
Overview of the Paper
Related LiteratureStudies of EMU on financial markets using monthly data:
• Beale, Ferrando, Hördahl, Krylova, and Monnet (2004)• Manganelli and Wolswijk (2007)
Analysis of EMU on macroeconomic convergence:• Canova, Ciccarelli, Ortega (2006)• Rogers (2007)
Analyses using high-frequency data:• long-term inflation expectations: Gürkaynak, Sack, and
Swanson (2005), Gürkaynak, Levin, and Swanson (2007)• effects of U.S. announcements on euro yields: Ehrmann
and Fratzscher (2006), Ehrmann, Fratzscher, and Rigobon (2006), Goldberg and Klein (2007)
DataDaily bond yields for four largest euro area countries:
• Germany• France• Italy• Spain
Also consider one “control” (non-euro area) country:• United Kingdom