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The Regime‐Dependent Determination of Credibility: A New Look at European Interest Rate Differentials

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  • Peter Tillmann

Abstract

. With persistence in macroeconomic variables two aspects of exchange rate credibility emerge whose relative importance varies over time. Both aspects have opposite implications for the relation between fundamentals and credibility. Hence, the effect of policy measures on interest rate differentials becomes ambiguous. In this paper a Markov‐switching VAR that allows for parameter shifts across regimes is employed to test the hypothesis of regime‐dependent determination of credibility for major EMS currencies. Regime‐dependent impulse response functions reveal substantial differences in the response of spreads to macroeconomic shocks across regimes.

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  • Peter Tillmann, 2003. "The Regime‐Dependent Determination of Credibility: A New Look at European Interest Rate Differentials," German Economic Review, Verein für Socialpolitik, vol. 4(4), pages 409-431, November.
    • Handle: RePEc:bla:germec:v:4:y:2003:i:4:p:409-431
    DOI: 10.1111/j.1465-6485.2003.00087.x
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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance

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