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Synchronization and nonlinear interdependence of short-term interest rates:

Author

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  • Mohamed El Hedi Arouri

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Fredj Jawadi

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique)

  • Duc Khuong Nguyen

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper we investigate the synchronization and nonlinear adjustment process of short-term interest rates for France, the US and the UK using the bi-directional feedback measures proposed by Geweke (1982).and appropriate smooth transition error-correction models (STECM). We find strong evidence of continual increases in bilateral synchronization of these interest rates from 2005 to 2009 as well as of their lead-lag causal interactions with a slight dominance of the US rate. Consistently, exogenous shifts in the US rate are found to lead those in France and the UK within a very short time spans from one to two days. Results from nonlinear modeling indicate that short-term interest rates converge towards a common equilibrium in the long-run in a nonlinear manner in that their time dynamics exhibit regime-switching behavior.

Suggested Citation

  • Mohamed El Hedi Arouri & Fredj Jawadi & Duc Khuong Nguyen, 2010. "Synchronization and nonlinear interdependence of short-term interest rates:," Working Papers hal-00507820, HAL.
    • Handle: RePEc:hal:wpaper:hal-00507820
    Note: View the original document on HAL open archive server: https://hal.science/hal-00507820v1
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    References listed on IDEAS

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    2. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
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