This paper provides a closer view on the interaction of exchange rate volatility and interest rate volatility in the Mercosur countries. We discuss several models that explain systematic correlations between the movements of both variables and their second statistical moments, i.e. their volatilities. In contrast to the "fear of floating" argument that could lead to a volatility trade-off, we argue that both variables are largely driven either by the credibility of a country or by politics in general and thus should move in the same direction. Subsequently, we test this hypothesis of a positive correlation between both variables empirically. As a final step, we control for the impact of third variables such as exchange rate misalignment, financial stress, and monetary volatility. Our results show that –independent from third variables–there is a notable co-movement of exchange rates and interest rates in Mercosur countries.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
Find related papers by JEL classification: E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
MPRA Paper
14000, University Library of Munich, Germany.
[Downloadable!]
Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fear of Floating,"
NBER Working Papers
7993, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fixing for Your Life,"
NBER Working Papers
8006, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Reinhart, Carmen & Calvo, Guillermo, 2001.
"Fixing for your life,"
MPRA Paper
13873, University Library of Munich, Germany.
[Downloadable!]
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.)