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GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 02 de 2002

  

The Term Structure of the Spreads between Portuguese and

German Interest Rates during Stage II of EMU


José Soares da Fonseca
GEMF/Faculdade de Economia, Universidade de Coimbra

Abstract:
The spread between interest rates denominated in different currencies represents the expectations on exchange rate changes, according to the uncovered interest rate parity condition. In the present research the short- and long-term spreads between Portuguese and German Treasury bonds interest rates are studied, using weekly data covering the period from 1993-08-02 to 1998-12-14, supplied by the Banco de Portugal. The interdependence of the two spreads is estimated using cointegration methods, and their dynamic adjustment to the long-term relation is determined using impulse response analysis. The main conclusions of this research are that there was a structural break in the long-term relation between the two spreads in mid 1994, and that that relation was afterwords dominated by the consistent convergence of the Portuguese interest rates to European levels.

JEL Classification: E43.

Keywords:
Term structure, interest rate parity, cointegration, structural break.

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