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Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries

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  • Vincent Bouvatier

    ()
    (Centre d'Economie de la Sorbonne (CES))

Abstract

This paper investigates the relationship between international interest rate differentials and the risk premium during the 1997-1998 Asian crisis. Variables standing for the accumulation of imbalances in the monetary sector are used as proxies for the risk premium. We show,using a Vector Error Correction Model (VECM) on monthly data from January 1994 to December 2002, that the international interest rate differentials are driven by the risk premium indicators. This result explains the temporary inability of high interest rates to support exchange rates. However, the risk premium considered in this paper would have been required regardless of the interest rate policy. Consequently, high interest rates helped to prevent exchange rates from depreciating more.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 5 (2007)
Issue (Month): 6 ()
Pages: 1-14

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Handle: RePEc:ebl:ecbull:eb-07e40001

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Cited by:
  1. Mykhaylova, Olena, 2010. "Optimal Monetary Policy with Non-Zero Net Foreign Wealth," MPRA Paper 23598, University Library of Munich, Germany.
  2. Nagayasu, Jun, 2010. "The Common Component in the Forward Premium: Evidence from the Asia-Pacific Region," MPRA Paper 24549, University Library of Munich, Germany.

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