EQUILIBRIUM REAL INTEREST-RATE LINKAGES - THE UNITED-STATES AND JAPAN

In this paper, we examine how the internationalization of Japan's econ omy is evidenced in the linkage between Japanese and U.S. real interes t rates. We use a measure of the equilibrium real interest rate differ ential between Japan and the United States to draw inferences about th e nature of financial interdependence between the two countries. We al so measure the speed at which the real interest rate differential conv erges to an equilibrium value following an initial disturbance, and th e individual responses of real interest rates in the United States and Japan. Using information from real interest rate linkages, we shed li ght on the relative importance of Japan in world capital markets for t he period since Japan introduced its new Foreign Exchange and Foreign Trade Control Law in December 1980. J. Japan. Int Econ., June 1997, 11 (2), pp. 208-227. Department of Economics, University of California, S anta Cruz, California 95064. (C) 1997 Academic Press.