Quantitative analysis of degree of integration between the Irish and U.K. financial markets

Abstract

In this paper, we investigate the quantitative relationship between Irish and U.K. interest rates. With varying degrees of emphasis, it is frequently stated that Irish interest rates mirror U.K. rates and can be treated, therefore, as exogenous, given the present exchange rate policy and the high degree of capital mobility between Ireland and the U.K. I t is easy to see why economists have focused on this question, as, for example, Branson (1976) shows in an elegant paper, the independent use of monetary policy in the sense of regulating the money supply requires that a central bank be able to regulate some domestic interest rate. I f this is the case, a central bank can control the money stock by engaging in open-market operations on the financial asset whose interest rate it can alter. A by-product of the paper is evidence on the lags in the adjustment of Irish to foreign (U.K.) interest rates.