Wavelet comovement analysis of interest rates linkages among g-6 countries

One of the most important economic events of our times is the Great Recession. In this era of tremendous volatility and unprecedented developments in the global financial markets, the main tool that the Central Banks have relied on while combating this unique economic phenomenon has been nothing but the interest rates. However, the focus on the importance of short-run interest rates have been replaced by the paradigm that interest rates of all maturities do matter especially in the fight against the expected level of inflation which many believe could cause further fluctuations. In this study, we investigate the long-run, medium-run and short run interest rates linkages among G-6 countries. We use a cointegration technique and have considered a possible structural break for the long-run relationship between interest rates pairs. We have found that 19 out of 45 pairs are cointegrated and 11 of them have cointegration relationships with a structural break. The existence of cointegration relationships implies that only 19 pairs have common stochastic trend. On the other hand we analyze the common cycles between interest rates pairs by using codependence methodology. Findings showed that 15 out of 19 pairs both have common stochastic trend and common cycles and 23 pairs have only common cycles. In total 38 out of 45 pairs have common cycles. To further strengthen our argument, we employ Rua (2010) wavelet comovement methodology. Our results are in line with the argument that the US is leading the other countries at every time period which is why the Great Recession could be termed as a unique event.