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Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries

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  • Vincent Bouvatier

    (Centre d'Economie de la Sorbonne (CES))

Abstract

This paper investigates the relationship between international interest rate differentials and the risk premium during the 1997-1998 Asian crisis. Variables standing for the accumulation of imbalances in the monetary sector are used as proxies for the risk premium. We show,using a Vector Error Correction Model (VECM) on monthly data from January 1994 to December 2002, that the international interest rate differentials are driven by the risk premium indicators. This result explains the temporary inability of high interest rates to support exchange rates. However, the risk premium considered in this paper would have been required regardless of the interest rate policy. Consequently, high interest rates helped to prevent exchange rates from depreciating more.

Suggested Citation

  • Vincent Bouvatier, 2007. "Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries," Economics Bulletin, AccessEcon, vol. 5(6), pages 1-14.
    • Handle: RePEc:ebl:ecbull:eb-07e40001
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    2. Adeline Bachellerie & Jérôme Héricourt & Valérie Mignon, 2009. "From various degrees of trade to various degrees of financial integration: What do interest rates have to say?," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 64(03), pages 365-402, December.
    3. Jun Nagayasu, 2011. "The Common Component in Forward Premiums: Evidence from the Asia–Pacific Region," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 750-762, September.
    4. Staveley-O’Carroll, James & Staveley-O’Carroll, Olena M., 2018. "Exchange rate targeting in the presence of foreign debt obligations," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 113-134.
    5. Bhatta, Guna Raj & Nepal, Rabindra & Harvie, Charles & Jayanthakumaran, Kankesu, 2022. "Testing for the uncovered interest parity condition in a small open economy: A state space modelling approach," Journal of Asian Economics, Elsevier, vol. 82(C).
    6. Mykhaylova, Olena, 2010. "Optimal Monetary Policy with Non-Zero Net Foreign Wealth," MPRA Paper 23598, University Library of Munich, Germany.

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    JEL classification:

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

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