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Interest rate volatility, exchange rates, and external contagion

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  • Osman Suliman

Abstract

US interest rate volatility and contagion effects (propagation of crises) are investigated using GARCH equations over the period 1993.01-1998.12. The period includes two main financial crises: the 1994 Mexican peso crisis and the 1997 Japanese yen crisis. Contagion is more likely to occur in cointegrated markets with available open channels. The purchasing power and interest parities' channels suggest that the domestic inflation rate reflects some influence of the foreign exchange rate. The results indicate that, although the bulk of the US interest volatility is idiosyncratic, spillovers from Mexican exchange rate changes are more likely to induce contagion effects on US interest rates than Japanese exchange rates, possibly because of increased capital flows after NAFTA. Further, unlike the floating rate of Japan, the Mexican fixed exchange rate encourages international capital flows.

Suggested Citation

  • Osman Suliman, 2005. "Interest rate volatility, exchange rates, and external contagion," Applied Financial Economics, Taylor & Francis Journals, vol. 15(12), pages 883-894.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:12:p:883-894
    DOI: 10.1080/09603100500119086
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    Cited by:

    1. Aslam, Faheem & Hunjra, Ahmed Imran & Memon, Bilal Ahmed & Zhang, Mingda, 2024. "Interplay of multifractal dynamics between shadow policy rates and energy markets," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    2. Giampiero Gallo & Edoardo Otranto, 2006. "Volatility Transmission Across Markets: A Multi-Chain Markov Switching Model," Econometrics Working Papers Archive wp2006_04, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
    3. Lahrech, Abdelmounaim & Sylwester, Kevin, 2013. "The impact of NAFTA on North American stock market linkages," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 94-108.
    4. Yu Hsing, 2006. "Analysis of Short-term Exchange Rate Movements in Korea: Application of an Extended Mundell-Fleming Model," Global Economic Review, Taylor & Francis Journals, vol. 35(2), pages 145-151.
    5. HSING, Yu, 2006. "Determinants Of Exchange Rate Fluctuations For Venezuela: Application Of An Extended Mundell-Fleming Model," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(1).

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