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The convergence of international interest rates prior to Monetary Union


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  • Wilfling, Bernd


The process of international interest rate convergence for arbitrary terms (represented by the term structure of interest rate differentials) is derived in a model of a small open economy which faces a purely time-contingent exchange rate regime switch from flexible to fixed rates. Special attention is paid to a situation in which financial markets deem a delay in the regime switch beyond the publicly announced fixing date possible. The closed-form solution of the term structure allows us to analyze the volatility of interest rate differentials thus providing a useful tool for interest-rate-sensitive security valuation and other risk management applications. Furthermore, the model demonstrates that the economy under consideration has to pay for the exchange rate stabilization triggered by the mere announcement of future regime switching by a higher uncertainty in the evolution of domestic interest rates. -- Diese Arbeit beschreibt den Konvergenzprozeß internationaler Zinssätze beliebiger Fristigkeit (repräsentiert durch die Zeitstruktur von Zinsdifferentialen) unter der Modellannahme einer kleinen offenen Volkswirtschaft, die sich einem zeitlich fest terminierten Übergang von flexiblen Wechselkursen in ein Festkurssystem gegenübersieht. Besondere Berücksichtigung findet dabei eine Situation, in der die Finanzmärkte eine Verzögerung des Regimewechsels über das von den wirtschaftspolitischen Instanzen angekündigte Regimewechseldatum hinaus für möglich halten. Die analytisch geschlossene Gleichgewichtslösung für die Zeitstruktur ermöglicht eine exakte Analyse der Volatilität der Zinsdifferentiale. Diese Ergebnisse sind von hoher praktischer Relevanz für die Bewertung zinssensitiver Finanzanlagen bzw. für anderweitige Anwendungen im Bereich des Zinsrisikomanagements. Ein weiteres zentrales Ergebnis des theoretischen Modells besteht darin, daß die betrachtete Volkswirtschaft die Wechselkursstabilisierung, welche durch die bloße politische Ankündigung der zukünftigen Implementierung eines Festkurssystems induziert wird, mit einer erhöhten Unsicherheit im Hinblick auf die inländische Zinsentwicklung bezahlen muß.

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Bibliographic Info

Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 127.

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Date of creation: 2001
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Handle: RePEc:zbw:hwwadp:26165

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Keywords: Exchange rate regime switches; interest rates; term structure; stochastic processes; uncertainty;

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