Interest rate linkages: identifying structural relations

This paper examines the structural linkages that may exist between the G7 national interest rates. Its aim is to exploit some new techniques in cointegration analysis to see to what extent conclusions can be drawn purely from the data without imposing any arbitrary identification conditions. Linkages between I(1) series are examined as structural relations, using a technique that is a variation of a method proposed by Davidson that involves the introduction of the new concept of an irreducible cointegrating vector. In order to distinguish between structural and solved irreducible cointegrating relations, the ranking of irreducible cointegrating vectors according to the criterion of minimum variance is introduced. This methodology is applied to the system linking the G7 short-term interest rates, obtaining some interesting results.