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The fundamental determinants of interest rate differentials in the ERM.
- Source :
- Applied Economics; Feb1998, Vol. 30 Issue 2, p165-176, 12p, 2 Charts, 2 Graphs
- Publication Year :
- 1998
-
Abstract
- The paper analyses the sources of persistent interest rate differentials vis-a-vis Germany that have existed in Belgium, Denmark, France, Ireland, Italy, and the Netherlands. In a target zone system like the ERM, interest rate differentials mainly reflect devaluation expectations, which are measured here by raw 1-month Euromarket interest rate differentials, drift-adjusted 1-month differentials, and differentials in long-term government bond yields. The role of a large set of fundamental macroeconomic variables that may have affected these devaluation expectations is investigated within a vector autoregressive (VAR) setting, by means of Granger-causality tests, impulse-response functions and variance decompositions. We find no evidence that fundamentals are more relevant to drift-adjusted devaluation risk than for unadjusted interest rate differentials. A significant impact of inflation, budget deficits, and unemployment becomes evident for almost all ERM-participants. [ABSTRACT FROM AUTHOR]
- Subjects :
- INTEREST rates
DEVALUATION of currency
MACROECONOMICS
BOX-Jenkins forecasting
Subjects
Details
- Language :
- English
- ISSN :
- 00036846
- Volume :
- 30
- Issue :
- 2
- Database :
- Complementary Index
- Journal :
- Applied Economics
- Publication Type :
- Academic Journal
- Accession number :
- 387973
- Full Text :
- https://doi.org/10.1080/000368498325976