An empirical analysis of the German long-term interest rate

This paper estimates the short run and long run influences of the main determinants of the German long-term interest rate using quarterly data for the period 1982-1999. A major reason for our 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 intemational capital market. The specification of our interest rate equation encompasses various theories on interest formation. The short-term German interest rate and American and Japanese bond rates appear to be the most prominent determinants of the German (and hence Euro) rate but also the business cycle and the demand for capital play a role in explaining this interest rate.