Determinants of long-term interest rates in the United States and the euro area: A multivariate approach.

This article looks at the factors explaining the level of US and European long-term interest rates between 1986 and 2005. We begin by selecting the structural determinants of long-term interest rates, dealing with the US and European cases separately. However, a univariate framework cannot capture market integration and suffers from a number of statistical limitations. Switching to a multivariate setting reveals spillover from US to euro area long-term yields, with no reciprocal effect. The model allows us to draw up a timeline of events affecting the level of US and European long-term interest rates. Accordingly, the bursting of the internet bubble, purchases by foreign agents, both official and private, and the increase in global liquidity all seemingly exerted downward pressure on US long-term interest rates and, indirectly, on euro area long rates.