DEPOCEN Working Paper Series
Mohamed El Hedi Arouri, Fredj Jawadi, Duc Khuong Nguyen, 2010. "Modeling nonlinear and heterogeneous dynamic linkages in international monetary markets"
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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