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The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials


  • Peter Tillmann


With persistence in macroeconomic variables two aspects of exchange rate credibility emerge whose relative importance varies over time. Both aspects have opposite implications for the relation between fundamentals and credibility. 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 currencies. Regime-dependent impulse response functions reveal substantial differences in the response of spreads to macroeconomic shocks across regimes. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd 2003.

Suggested Citation

  • Peter Tillmann, 2003. "The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials," German Economic Review, Verein für Socialpolitik, vol. 4, pages 409-431, November.
  • Handle: RePEc:bla:germec:v:4:y:2003:i::p:409-431

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    References listed on IDEAS

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    Cited by:

    1. Jorge Andrés Tamayo Castaño, 2012. "Asimetrías en la demanda por trabajo en Colombia: el papel del ciclo económico," Borradores de Economia 689, Banco de la Republica de Colombia.
    2. 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.
    3. Lanzafame, Matteo & Nogueira, Reginaldo, 2013. "Inflation targeting and interest rates," MPRA Paper 46153, University Library of Munich, Germany.
    4. 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.
    5. 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.

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance


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