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Interest Rate Volatily, Contagion and Convergence: And Empirical Investigation of the Cases of Argentina, Chile and México

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  • Sebastian Edwards

    () (University of California, Los Angeles)

Abstract

Current debates on globalization have tended to focus on financial market volatility and contagion. In fact, many proponents of the imposition of some form of capital restrictions in emerging markets have argued that these would help reduce - or even eliminate -spillover across emerging market. Although this has been an old concern among developing economies, it has become more generalized after the Mexican, East Asian and Russian crises. In this paper I use high frequency data on short term nominal interest rates during the 1990s in three Latin American countries - Argentina, Chile and Mexico -- to analyze whether there has been volatility contagion from Mexico to the two South American nations. The results obtained from the estimation of augmented GARCH equations indicate, quite strongly, that while there has been volatility contagion from Mexico to Argentina, there has been no volatility contagion from Mexico to Chile. These results also indicate, however, that with the exception of a brief period in 1995, nominal interest rates have been more volatile in Chile than in Argentina. The results reported in this paper also indicate that interest rate differentials with respect to the US have tended to disappear somewhat slowly in both Chile and Argentina. Moreover, the estimation of rolling regressions for Chile indicate that after capital controls on capital inflows were imposed, interest rate differentials became more sluggish and tended to disappear more slowly than during the free capital mobility period.

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File URL: http://www.cema.edu.ar/publicaciones/download/volume1/edwards.pdf
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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): I (1998)
Issue (Month): (November)
Pages: 55-86

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Handle: RePEc:cem:jaecon:v:1:y:1998:n:1:p:55-86

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  1. Michael P. Dooley, 1995. "A Survey of Academic Literature on Controls over International Capital Transactions," IMF Working Papers 95/127, International Monetary Fund.
  2. Michael P. Dooley & Donald J. Mathieson & Liliana Rojas-Suarez, 1997. "Capital Mobility and Exchange Market Intervention in Developing Countries," NBER Working Papers 6247, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sebastian Edwards & Raúl Susmel, 1999. "Contagion and Volatility in the 1990s," CEMA Working Papers: Serie Documentos de Trabajo. 153, Universidad del CEMA.
  2. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 65-84, Fall.
  3. Jorge Eduardo Carrera & Mariano Feliz & Demian Panigo & Marcelo Saavedra, 2001. "Dollarization as an Asymmetric Monetary Union. The Case of Argentina," Anais do XXIX Encontro Nacional de Economia [Proceedings of the 29th Brazilian Economics Meeting] 043, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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