Understanding International Long-term Interest Rate Comovement

This research is another example of extending cutting-edge macroeconomic tools with financial market and asset pricing concepts. It targets the high degree of co-movement between long-term interest rates in the UK with the US yield curve.

Typically, the high degree of asset price co-movement is difficult to reconcile through economic fundamentals alone. This paper integrates term premia and inflation trends into a Dynamic Stochastic General Equilibrium (DSGE) model, which is a key tool used by central banks across the world. The model allows for structural interpretations of co-movement in long-term interest rates, and highlights how co-movement can arise from the UK central bank accommodating inflation trends in the US.