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MODELING NONLINEAR AND HETEROGENEOUS DYNAMIC LINKS IN INTERNATIONAL MONETARY MARKETS

Published online by Cambridge University Press:  01 May 2012

Mohamed El Hedi Arouri ,
Fredj Jawadi  and
Duc Khuong Nguyen
Mohamed El Hedi Arouri
Affiliation:
EDHEC Business School
Fredj Jawadi
Affiliation:
University of Evry Val d'Essonne
Duc Khuong Nguyen*
Affiliation:
ISC Paris School of Management
*
Address correspondence to: Duc Khuong Nguyen, ISC Paris School of Management, 22 boulevard du Fort de Vaux, 75017 Paris cedex, France; e-mail: dnguyen@iscparis.com.
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Abstract

We use daily short-term interbank interest rates of France, the United Kingdom, and the United States to examine the dynamic links of international monetary markets from 2004 to 2009. Results from vector error-correction models and smooth-transition error-correction models show strong evidence of nonlinear and heterogeneous causalities between the three interest rates. We also find that changes in the U.S. interest rate deviations from the long-run equilibrium led those in France and in the United Kingdom by one to two days. Finally, the national interest rate nexus appears to converge in nonlinear fashion toward a steady state because it is subject to structural change beyond a certain rate threshold. Our findings have important implications for the actions of leading central banks (ECB, Bank of England, and U.S. Fed) because the joint behavior of short-term interest rates can be viewed as an indicator of the degree of central banks' policy interdependence.

Keywords

International Monetary Market RelationshipsShort-Term Interest RatesVector Error-Correction ModelsSmooth-Transition Error-Correction Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Supplement S2: Time-Varying Modeling with Macroeconomic and Financial Data , September 2012 , pp. 232 - 251
Copyright
Copyright © Cambridge University Press 2012

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