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The French-German Interest Rate Differential Since German

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Author Info

  • 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.

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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0503009.

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Length: 40 pages
Date of creation: 30 Mar 2005
Date of revision:
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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Web page: http://128.118.178.162

Related research

Keywords: Interest rates; cointegration; heteroskedasticity; GARCH; EMS; Asymmetry in the ERM;

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References

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