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Modeling nonlinear and heterogeneous dynamic linkages in international monetary markets

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Author Info

  • Mohamed El Hedi Arouri

    ()
    (LEO, University of Orleans and EDHEC Business School Rue de Blois - BP 6739, 45067 Orléans Cedex 2, France)

  • Fredj Jawadi

    ()
    (Amiens School of Management and EconomiX-CNRS 18, place Saint Michel, 80000 Amiens cedex, France)

  • Khuong Nguyen Duc

    ()
    (Professor of Finance, ISC Paris School of Management 22 Boulevard du Fort de Vaux, 75848 Paris cedex 17, France)

Abstract

In this paper we examine the dynamic linkages of international monetary markets over the 2004 - 2009 period using daily short-term interbank interest rates of three of the most advanced countries (France, United Kingdom and United States). Empirical results from vector error-correction models (VECM) and smooth transition error-correction models (STECM) indicate strong evidence of nonlinear and heterogeneous causalities between the three interest rates considered. We also find that exogenous shifts in the US short-term interest rate led those in France and in the UK within a horizon of one to two days. Finally, the national interest rate nexus appears to nonlinearly converge towards a steady state or a common long-run equilibrium because it is subject to structural change beyond a certain interest rate threshold. Our findings have important implications for the actions of leading central banks (ECB, Bank of England, and US Fed) since the behavior of short-term interest rates can be viewed as an indicator of the degree of central banks’ policy interdependence.

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Bibliographic Info

Paper provided by Development and Policies Research Center (DEPOCEN), Vietnam in its series Working Papers with number 14.

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Length: 39 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:dpc:wpaper:1410

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Keywords: international monetary market relationships; short-term interest rates; VECMs and STECMs;

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  1. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
  2. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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