Macroeconomic Dynamics

Articles

MODELING NONLINEAR AND HETEROGENEOUS DYNAMIC LINKS IN INTERNATIONAL MONETARY MARKETS

Mohamed El Hedi Arouria1, Fredj Jawadia2 and Duc Khuong Nguyena3 c1

a1 EDHEC Business School

a2 University of Evry Val d'Essonne

a3 ISC Paris School of Management

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 Relationships;
  • Short-Term Interest Rates;
  • Vector Error-Correction Models;
  • Smooth-Transition Error-Correction Models

Correspondence:

c1 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.

Footnotes

The authors are grateful to the three anonymous reviewers and the editor (William A. Barnett) for their helpful and valuable comments.

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