Convergence and Anchoring of Yield Curves in the Euro Area


Michael Ehrmann

Marcel Fratzscher

Refet S. Gürkaynak

Eric T. Swanson

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2007-24 | November 1, 2008

We study the convergence of European bond markets and the anchoring of inflation expectations in the euro area using high-frequency bond yield data for France, Germany, Italy, and Spain as well as smaller euro area countries and a control group comprising the UK, Denmark, and Sweden. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, we present evidence that the elimination of exchange rate risk and the adoption of a common monetary policy were the primary drivers of bond market convergence in the euro area, as opposed to fiscal policy restraint and the loose exchange rate peg of the 1990s.

Article Citation

Swanson, Eric T., Marcel Fratzscher, Michael Ehrmann, and Refet S. Gürkaynak. 2007. “Convergence and Anchoring of Yield Curves in the Euro Area,” Federal Reserve Bank of San Francisco Working Paper 2007-24. Available at