Causal linkages between US and Eurodollar interest rates: further evidence

Abstract

This study examines causal linkages between US and Eurodollar interest rates during 1983 - 2002. Recursive cointegration analysis shows that a stable cointegration relationship between the two interest rates emerges only since the early 1990s, when the Fed used federal funds rate targeting and eliminated the reserve requirement on Eurocurrency deposits. The study further reveals that bidirectional causality exists between the two rates over the period of 1993 to 2002, while unidirectional causality from Eurodollar rate to the US rate is found to exist over the period of 1983 to 1991. These findings consistently support increased interest rate linkages especially since the early 1990s.