Determinants of long-term interest rates in the Scandinavian countries
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http://hdl.handle.net/11250/180701Utgivelsesdato
2006Metadata
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Abstract:
The financial markets in a small open economy like the Scandinavian countries are influenced by
international economic developments, especially in their major trading partners. This paper
investigates to which degree nominal long-term interest rates in Norway, Sweden and Denmark are
determined by fundamental domestic macroeconomic variables and by international economic
conditions. Relating the level of interest rates to international macroeconomic variables also sheds
some light on the degree of financial marketintegration. In Norway the currency risk, exchange rate
regime, international debt and unemployment in Europe are significant in explaining the interest rate
differential. In Sweden domestic and US inflation are important, while for Denmark domestic debt,
domestic and US money stock, and less significantly US inflation are determinants of the interest
rate differential. In these three countries with quite different economies the expectations hypothesis,
the effect of domestic growth and unemployment and of international growth are not supported as
determinants of long-term interest rate differentials.
Keywords: long-term interst rates, expectation hypothesis, international macroeconomic influence,
crowding out