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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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  8. Lars E.O. Svensson, 1990. "The Simplest Test of Target Zone Credibility," NBER Working Papers 3394, National Bureau of Economic Research, Inc.
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Cited by:
  1. Michael Frömmel, 2010. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 2-21, February.
  2. Jorge Andrés Tamayo Castaño, 2012. "Asimetrías en la demanda por trabajo en Colombia: el papel del ciclo económico," BORRADORES DE ECONOMIA 009286, BANCO DE LA REPÚBLICA.
  3. Lanzafame, Matteo & Nogueira, Reginaldo, 2013. "Inflation targeting and interest rates," MPRA Paper 46153, University Library of Munich, Germany.
  4. 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.
  5. Nikolay Markov, 2010. "A Regime Switching Model for the European Central Bank," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 10091, Institut d'Economie et Econométrie, Université de Genève.

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