Discussion of
Convergence and Anchoring of Yield Curves in the Euro Area by Ehrmann, Fratzscher, G¨urkaynak and Swanson Ulf S¨ oderstr¨ om Sveriges Riksbank and CEPR
January 2009
1. This paper
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Strong convergence in Euro Area yield curves, at high frequency I I
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Unconditional: Correlations between yields Conditional: Response to macro announcements
Inflation expectations better anchored in Italy and Spain
Unconditional convergence
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Bonds close substitutes: Differences in risk and liquidity small
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Also global convergence (great moderation), but additional convergence within EMU
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Reassuring: EMU credible What explains the remaining differences?
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Risk of default or leaving EMU probably very small Liquidity differences? Look at volumes
Conditional convergence I
Important: even stronger case for convergence
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But some differences remain
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Response of 10-year yields to US non-farm payrolls: France 3.56 (0.60) Germany 1.58 (0.68) Italy 3.44 (0.62) Spain 0.48 (0.83) Differences seem statistically significant (test?)
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Economically significant?
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Driven by outliers?
Anchoring of inflation expectations
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Not effect of EMU per se, but of credible monetary policy
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G¨ urkaynak, Levin, and Swanson (2006): Inflation expectations better anchored in UK and Sweden than in US
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Beechey, Johanssen, and Levin (2007): Inflation expectations better anchored in EMU than in US
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How important was EMU? Compare Euro area and UK/Sweden?
2. Have other interest rates converged?
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Bond yields first part of transmission mechanism
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What about deposit and loan rates? Have they converged?
Interest rates on household deposits Coefficient of variation 0.7 Overnight
< 1 year
1-2 years
> 2 years
0.6 0.5 0.4 0.3 0.2 0.1 0 2003
Source: European Central Bank
2004
2005
2006
Interest rates on firm deposits Coefficient of variation 0.6 Overnight
< 1 year
1-2 years
> 2 years
0.5 0.4 0.3 0.2 0.1 0 2003
Source: European Central Bank
2004
2005
2006
Interest rates on household mortgage loans Coefficient of variation 0.12 0.1 0.08 0.06 0.04 0.02 < 1 year
1-5 years
5-10 years
> 10 years
0 2003
Source: European Central Bank
2004
2005
2006
Interest rates on firm loans below EUR 1m Coefficient of variation 0.14 0.12 0.1 0.08 0.06 0.04 0.02
< 1 year
1-5 years
> 5 years
0 2003
Source: European Central Bank
2004
2005
2006
Interest rates on firm loans above EUR 1m Coefficient of variation 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02
< 1 year
1-5 years
> 5 years
0 2003
Source: European Central Bank
2004
2005
2006
Interest rate convergence
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Some deposit and loan rates have converged since 2003
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But not all, some have diverged
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Differences depend on market characteristics, regulation, fiscal treatment, etc
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Case for more harmonization?
3. Interest rate convergence in the Nordic countries
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Similar background, culture, welfare state
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Similar industrial structure in Sweden and Finland Different relations to EU and EMU:
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Finland member of EU and EMU Denmark member of EU, not EMU, but ERMII Sweden member of EU, not EMU Norway not member
Compare government bond yields
10-year yields in the Nordic countries 1993–2008 14 12
EA
SE
NO
DK
FI
10 8 6 4 2 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Sveriges Riksbank, Reuters
10-year yields in the Nordic countries 1999–2008 8 EA
7
SE
NO
DK
FI
6 5 4 3 2 1 0 1999
2000
2001
2002
Source: Sveriges Riksbank, Reuters
2003
2004
2005
2006
2007
2008
2009
10-year yield spreads against Euro Area 1999–2008 2.0 SE
NO
DK
FI
1.5
1.0
0.5
0.0
-0.5 1999
2000
2001
Source: Sveriges Riksbank, Reuters
2002
2003
2004
2005
2006
2007
2008
2009
10-year yields in the Nordic countries 2007–2008 5.5
5.0
4.5
4.0
3.5 EA 3.0 Jan-07
SE
Apr-07
NO
DK
Jul-07
Source: Sveriges Riksbank, Reuters
FI
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
10-year yield spreads against Euro Area 2007–2008 0.75
0.50
0.25
0.00
-0.25 SE -0.50 Jan-07
NO
Apr-07
DK
Jul-07
Source: Sveriges Riksbank, Reuters
FI
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Convergence in Nordic countries
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Convergence from 1993
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Finland and Denmark close to EMU Danish exchange rate peg credible
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Sweden fairly close
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Norway outlier
What happened in the crisis?
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Norway relatively little affected Finland and Denmark diverged since mid-2007 I I
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Denmark tightened monetary policy, less credible peg? Finland?
Swedish yields below EMU, closer than Finland and Denmark
Chart 3.7 Intra-euro area yield spreads on ten-year government bonds
10-year spreads (Jan. 2006 – yield Nov. 2008; basis points)against Germany Greece Italy Spain France 180 160 140 120 100 80 60 40 20 0 -20 Jan.
180 160 140 120 100 80 60 40 20 0 -20 July 2006
Jan.
July 2007
Jan.
Source: European Central Bank Financial Stability Review , December 2008
July 2008
4. Wrapping up
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Great paper!
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Unconditional and conditional convergence reassuring
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Some differences remain, especially for conditional convergence What explains these? Suggestions for future work
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Importance of EMU for anchoring of inflation expectations Convergence in Nordic bond markets? Natural experiment Convergence in other interest rates Divergence in the financial crisis
