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A Note on the Volatilities of the Interest Rate and the Exchange Rate Under Different Monetary Policy Instruments: Mexico 1998-2008

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  • Guillermo Benavides
  • Carlos Capistrán

Abstract

To advance our understanding of the mechanisms through which monetary policy affect the economy, in this note we analyze the volatilities of the Mexican short-term interest rate and of the peso-Dollar exchange rate under two monetary policy instruments: a non-borrowed reserves requirement target (the "Corto") and an interest rate target. Using tests for multiple structural changes, we document that both volatilities decreased around the time Banco de México started the transition from the former to the latter. With respect to the volatility transmission from interest rates to exchange rates and vice versa, we find, using a bivariate GARCH model and causality-in-variance tests, bi-causality during the period of the Corto, but no causal relation after the transition started.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B24C939F8-5ECF-488F-85EA-FEF8842B3ABC%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2009-10.

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Date of creation: Oct 2009
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Handle: RePEc:bdm:wpaper:2009-10

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Web page: http://www.banxico.org.mx
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Keywords: Corto; granger causality; multiple structural breaks; multivariate volatility.;

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  1. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, Elsevier, vol. 103(1-2), pages 183-224, July.
  2. Carrasco, Marine & Chen, Xiaohong, 2002. "Mixing And Moment Properties Of Various Garch And Stochastic Volatility Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 18(01), pages 17-39, February.
  3. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen VK, . "Multivariate GARCH models: a survey," CORE Discussion Papers RP -1847, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, Econometric Society, vol. 66(1), pages 47-78, January.
  5. Caporale, Guglielmo Maria & Pittis, Nikitas & Spagnolo, Nicola, 2002. "Testing for Causality-in-Variance: An Application to the East Asian Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(3), pages 235-45, July.
  6. Elena Andreou & Eric Ghysels, 2002. "Detecting multiple breaks in financial market volatility dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(5), pages 579-600.
  7. Hafner, C.M. & Herwartz, H., 2004. "Testing for causality in variance using multivariate GARCH models," Econometric Institute Research Papers EI 2004-20, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  8. Pantelidis, Theologos & Pittis, Nikitas, 2004. "Testing for Granger causality in variance in the presence of causality in mean," Economics Letters, Elsevier, Elsevier, vol. 85(2), pages 201-207, November.
  9. van Dijk, D.J.C. & Osborn, D.R. & Sensier, M., 2004. "Testing for causality in variance in the presence of breaks," Econometric Institute Research Papers EI 2004-48, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  10. Cheung, Yin-Wong & Ng, Lilian K., 1996. "A causality-in-variance test and its application to financial market prices," Journal of Econometrics, Elsevier, Elsevier, vol. 72(1-2), pages 33-48.
  11. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(01), pages 122-150, February.
  12. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
  13. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 116-31, February.
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Cited by:
  1. Hernandez, Manuel A. & Ibarra, Raul & Trupkin, Danilo R., 2011. "How far do shocks move across borders?: Examining volatility transmission in major agricultural futures markets," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 1109, International Food Policy Research Institute (IFPRI).
  2. Gardebroek, Cornelis & Hernandez, Manuel A., 2013. "Do energy prices stimulate food price volatility? Examining volatility transmission between US oil, ethanol and corn markets," Energy Economics, Elsevier, Elsevier, vol. 40(C), pages 119-129.
  3. Haixia, Wu & Shiping, Li, 2013. "Volatility spillovers in China’s crude oil, corn and fuel ethanol markets," Energy Policy, Elsevier, Elsevier, vol. 62(C), pages 878-886.
  4. Capraro Rodríguez Santiago & Perrotini Hernández Ignacio, 2012. "Intervenciones cambiarias esterilizadas, teoría y evidencia:el caso de México," Contaduría y Administración:Revista Internacional, Accounting and Management: International Journal, vol. 57(2), pages 11-44, abril-jun.

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