On interest rates in Belgium and the Netherlands: A comparative analysis of interest rate developments and financial innovations, 1980–1984

Summary Using the method op principal components, this paper examines the question of to what extent independent variations exist among observed market interest rates in Belgium and the Netherlands, and presents a speculative reflection on the main findings. The data employed are monthly observations on interest rates on the capital and the money market as well as on the Euro-money market. The sample period is 1980–1984. The analysis shows that the first principal component, which accounts for at least 80% of total variation, can be identified as the true rate of interest. The second principal component is interpreted as maturity in Belgium and risk in the Netherlands while the third principal component in Belgium reflects risk and international dependence but in the Netherlands the premium for inflation. Another conclusion is that the usual distinction between the money market and the capital market does not show up in the Dutch data but does in the Belgian.