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Maturities, Nonlinearities, and the International Transmission of Short-Term Interest Rates

Author

Listed:
  • Mougoue, Mbodja
  • Noula, Armand Gilbert
  • Ajayi, Richard A.

Abstract

This paper employs linear and nonlinear Granger causality tests to re-examine the dynamic relation between daily Eurodollar and U.S. certificates of deposit rates during the July 16, 1973 to May 1, 2006 period. This study also conducts sub-period analysis based on the switching regression technique of Goldfield and Quant (GQSRT) (1972, 1973, and 1976). The main empirical findings are (1) Full-sample results show significant bi-directional linear causality from the CD and CD interest rates for one-month maturities and unidirectional linear causality between the EURO and CD interest rates for three-month and six-month maturities. Furthermore, full-sample results reveal for all three maturities. (2) Sub-sample results based on linear tests show a unidirectional causal relation from the CD rate to the EURO rate during the first sub-period for all three maturities. During the second sub-period, however, linear tests uncover a strong bi-directional relation between the CD and the Euro rates for all three maturities. The linear results for the third sub-period reveal mostly unidirectional causality from the EURO rate to the Cd for three maturities. (3) Finally, sub-sample nonlinear causality tests reveal mostly a unidirectional causality from the CD rate to the EURO rate for all three maturities during the first sub-sample, a strong significant bi-directional causality between the two rates for all three maturities during the second sub-period, and an uneven bi-directional causality between the two rates for all three maturities during the third sub-period. Overall, the results of this study show that the EURO rate’s role is becoming more prominent compared to that of the CD rate.

Suggested Citation

  • Mougoue, Mbodja & Noula, Armand Gilbert & Ajayi, Richard A., 2008. "Maturities, Nonlinearities, and the International Transmission of Short-Term Interest Rates," Review of Applied Economics, Lincoln University, Department of Financial and Business Systems, vol. 4(1-2), pages 1-20.
    • Handle: RePEc:ags:reapec:50009
    DOI: 10.22004/ag.econ.50009
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    References listed on IDEAS

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