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Synchronization and nonlinear interdependence of short-term interest rates:

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  • Mohamed El Hedi Arouri

    ()
    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

  • F. Jawadi

    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II)

  • Duc Khuong Nguyen

    (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II)

Abstract

In this paper we investigate the synchronization and nonlinear adjustment process of short-term interest rates for France, the US and the UK using the bi-directional feedback measures proposed by Geweke (1982).and appropriate smooth transition error-correction models (STECM). We find strong evidence of continual increases in bilateral synchronization of these interest rates from 2005 to 2009 as well as of their lead-lag causal interactions with a slight dominance of the US rate. Consistently, exogenous shifts in the US rate are found to lead those in France and the UK within a very short time spans from one to two days. Results from nonlinear modeling indicate that short-term interest rates converge towards a common equilibrium in the long-run in a nonlinear manner in that their time dynamics exhibit regime-switching behavior.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00507820.

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Date of creation: 01 Aug 2010
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Handle: RePEc:hal:wpaper:hal-00507820

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  1. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
  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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