BRITISH INTEREST RATE CONVERGENCE BETWEEN THE US AND EUROPE: A RECURSIVE COINTEGRATION ANALYSIS

This paper discusses the question of the British state of convergence towards the Euro area, compared to the United States of American. Economically, the analysis is based in dependences on the money and capital markets, namely the Uncovered Interest Parity (UIP) and the Expectation Hypothesis of the Term (EHT) structure. The econometric procedure consists of backward recursive calculations carried out in a cointegration framework. As the evidence for the single parities remains unconvincing, UIP and EHT are combined in a common model. Generally, the results are in favor of a growing British integration into the European Currency Union.