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The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials

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  • Peter Tillmann

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Abstract

Once you allow for persistence in macroeconomic variables, two aspects of exchange rate credibility emerge whose relative importance can vary over time. Hence, the effect of policy measures on interest rate differentials becomes ambiguous. In this paper, a Markov-switching VAR that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent determination of credibility for major EMS countries. The model separates two regimes that are distinct with respect to the time series properties of the interest rate spread. Regime-dependent impulse response functions reveal substantial differences in the response of spreads to macroeconomic shocks across regimes.

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Bibliographic Info

Paper provided by Institute for Economic Policy, Cologne, Germany in its series IWP Discussion Paper Series with number 02/2001.

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Date of creation: May 2001
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Handle: RePEc:kln:iwpdip:dp02/01

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Keywords: Regime-switching; VAR; interest rate differentials; regime-dependent impulse response functions; credibility;

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  29. repec:fth:bfdipa:11/2001 is not listed on IDEAS
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Cited by:
  1. Frömmel, Michael, 2006. "Volatility Regimes in Central and Eastern European Countries' Exchange Rates," Hannover Economic Papers (HEP) dp-333, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
  3. Jorge Andrés Tamayo Castaño, 2012. "Asimetrías en la demanda por trabajo en Colombia: el papel del ciclo económico," Borradores de Economia 689, Banco de la Republica de Colombia.
  4. Lanzafame, Matteo & Nogueira, Reginaldo, 2013. "Inflation targeting and interest rates," MPRA Paper 46153, University Library of Munich, Germany.
  5. Nikolay Markov, 2010. "A Regime Switching Model for the European Central Bank," Research Papers by the Department of Economics, University of Geneva 10091, Département des Sciences Économiques, Université de Genève.

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