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

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Peter Tillmann

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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. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd 2003.

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Article provided by Blackwell Publishing in its journal German Economic Review.

Volume (Year): 4 (2003)
Issue (Month): (November)
Pages: 409-431
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Handle: RePEc:bla:germec:v:4:y:2003:i::p:409-431

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. M. Frömmel, 2007. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/487, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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