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The French-German Interest Rate Differential Since German

Author

Listed:
  • Jerome Henry

    (ECB)

  • Jens Weidmann

    (Bundesbank)

Abstract

We investigate the consequences of the 1992-1993 EMS crises, which resulted in the widening of the exchange rate bands, on the long-run linkages between the daily 1-month-Eurorates on German Mark, US-Dollar and French Franc. First, within a Gaussian VAR, both the US Eurorate and the French-German Eurorate differential are found stationary between December 1990 and December 1993. Second, using various GARCH models to account for heteroskedasticity show that Gaussian models can be misleading as to the interpretation of the linkages. Third, the estimated variance parameters are stable and the July 1993 episode is not linked to especially high a volatility. Finally, focusing on the French rate, we find asymmetry in the stochastic volatility, positive shocks being more persistent.

Suggested Citation

  • Jerome Henry & Jens Weidmann, 2005. "The French-German Interest Rate Differential Since German," International Finance 0503009, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0503009
    Note: Type of Document - pdf; pages: 40. Has appeared as: University of Bonn (SFB303), Discussion Paper No. B-295
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0503/0503009.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Interest rates; cointegration; heteroskedasticity; GARCH; EMS; Asymmetry in the ERM;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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