The French-German Interest Rate Differential since German Unification: The Impact of the 1992 and 1993 EMS Crisis
AbstractThe EMS crisis of 1992-1993, which resulted in the widening of the exchange rate bands, may have had some impact on the long-run structure of the system consisting of daily 1-month-Eurorates on German Mark, US-Dollar and French Franc. First, we find that both the US Eurorate and the German-French Eurorate differential are stationary over the December 1990 to December 1993 period, within a Gaussian VAR. Second, using GARCH-models to account for heteroskedasticity it is demonstrated that Gaussian models can induce a misleading interpretation of the linkages, namely about the effects of the American rate on the French one. In spite of the crisis and the changes in the ERM, the volatility parameters for the German-French interest rate differential are quite stable over the sample. This can be related to the observation that the July 1993 crisis is not linked to a specifically high volatility.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 295.
Date of creation: Dec 1994
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Interest rates; Cointegration; Heteroskedasticity; GARCH; EMS; Asymmetry in the ERM;
Find related papers by JEL classification:
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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