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Mohamed El Hedi Arouri, Fredj Jawadi, Duc Khuong Nguyen, 2010. "Modeling nonlinear and heterogeneous dynamic
linkages in international monetary markets"
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| Abstract: |
| In this paper we examine the dynamic linkages of international monetary markets over the 2004 - 2009
period using daily short-term interbank interest rates of three of the most advanced countries (France,
United Kingdom and United States). Empirical results from vector error-correction models (VECM) and
smooth transition error-correction models (STECM) indicate strong evidence of nonlinear and heteroge-
neous causalities between the three interest rates considered. We also find that exogenous shifts in the US
short-term interest rate led those in France and in the UK within a horizon of one to two days. Finally, the
national interest rate nexus appears to nonlinearly converge towards a steady state or a common long-run
equilibrium because it is subject to structural change beyond a certain interest rate threshold. Our findings
have important implications for the actions of leading central banks (ECB, Bank of England, and US Fed)
since the behavior of short-term interest rates can be viewed as an indicator of the degree of central
banks' policy interdependence. |
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