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

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  • Tillmann Peter

    (Universität Bonn, Bonn, Germany)

Abstract

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.

Suggested Citation

  • Tillmann Peter, 2003. "The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials," German Economic Review, De Gruyter, vol. 4(4), pages 409-431, December.
    • Handle: RePEc:bpj:germec:v:4:y:2003:i:4:p:409-431
    DOI: 10.1111/j.1465-6485.2003.00087.x
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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 9286, Banco de la Republica.
    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. 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.

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