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- Thomas J. Flavin & Michele G. Limosani (1998): Fiscal Policy and the Term Premium in Real Interest Rate Differentials
This paper seeks to identify the source of the risk premium in real interest rate differentials across European countries. In particular, we examine the link between real interest rate differentials, existing between various European countries and Germany, and domestic fiscal policy as proxied by the Debt/GDP ratios in these countries. Our results provide strong evidence that this variable exerts a significant influence on the determination of both the level and the volatility of the differential for both long term and short term interest rates.
RePEc:may:mayecw:n830498 Save to MyIDEAS - Bok-Keun Yu & Hwagyun Kim (2009): Decomposition of Interest Rate Differentials (in Korean)
The interest rate parity theorem suggests that the related financial assets that are otherwise identical among nations should have the same returns. ... In an attempt to better understand and quantify the nature of these deviations, we examine the main characteristics and possible causes of interest rate differentials, especially with the U.S., for twelve sample countries over two periods from the 2000s selected based upon the trends (upward and downward) of U.S. interest rates. ... We find that the interest rates of most sample countries induced by their monetary policy changes are more in sync with those of the U.S. during the period when the U.S. interest rate moved upward. Most of the interest rate differentials can be explained by currency factors during both the upward and downward periods. ... Furthermore, the test results show that the covered interest parity condition holds in most advanced countries, while it does not hold in the emerging market countries.
RePEc:bok:journl:v:15:y:2009:i:2:p:97-135 Save to MyIDEAS - Shabbir, Safia & Iqbal, Javed & Hameed, Saima (2013): Risk Premium, Interest Rate Differential, and Subsidized Lending in Pakistan
Episodes of monetary contraction increases the risk premium of the enterprises which results in higher effective interest rate differential between market loans and subsidized loan; making these firms more reliant on subsidized loans. ... This study evaluates the subsidized lending schemes of Pakistan using information on risk premium and effective interest rate differential of 174 exporting corporate firms over thirteen years (1999-2011). ... Additionally, using matched sample with loan level data from eCIB, we found that during the phases of high interest rate differential enterprises substituted their short term market loans with subsidized loans (export finance); while no such substitution is observed between long term loans and LTFF.
RePEc:pra:mprapa:48250 Save to MyIDEAS - Mr. Francisco d Nadal De Simone & Weshah Razzak (1999): Nominal Exchange Rates and Nominal Interest Rate Differentials
This paper reexamines some unsettled theoretical and empirical issues regarding the relationship between nominal exchange rates and interest rate differentials and provides a model for the behavior of exchange rates in the long run, where interest rates are determined in the bond market. The model predicts that an increase in the interest rate differential appreciates the home currency. ... The first two pairs of exchange rates—for which purchasing power parity seems to hold—display a strong relationship with interest rate differentials.
RePEc:imf:imfwpa:1999/141 Save to MyIDEAS - Peter Golit & Afees Salisu & Akinwunmi Akintola & Faustina Nsonwu & Itoro Umoren (2019): Exchange Rate And Interest Rate Differential In G7 Economies
We offer new insights on the dynamics of the exchange rate-interest rate differential for the case of G7 economies.
RePEc:idn:journl:v:22:y:2019:i:3b:p:263-286 Save to MyIDEAS - Thomas J. Flavin & Michele G. Limosani (2000): Explaining European Short-term Interest Rate Differentials: An Application of Tobin's Portfolio Theory
This paper seeks to identify potential determinants of short interest rate differentials across European countries. We rely on the portfolio theory of Tobin to choose our set of risk factors and then assess the ability of these macroeconomic variables to influence both the conditional mean and volatility of interest rate differentials. The macroeconomic variables employed in the analysis may be loosely considered to reflect both domestic government fiscal and monetary policy and international influences.We find significant ARCH-in-mean effects, implying that the conditional volatility of the interest rate differential exerts an important influence in the determination of its mean value. There are also significant short-run contagion effects whereby volatility in the macroeconomic factors is transmitted to the overall riskiness of the differential which in turn impacts upon the level of the differential.
RePEc:may:mayecw:n1000500 Save to MyIDEAS - Carlos Ibarra (2005): The Behavior of Interest Rate Differentials Under Shifting Exchange Rate Regimes: The Experience of Chile, Colombia and Israel
This paper studies the dynamics of the interest rate differential across band and floating exchange rate regimes in Chile, Colombia and Israel, and in a benchmark group composed of Italy, Portugal and Spain. Significant differences in the interest rate-ex
RePEc:ioe:cuadec:v:42:y:2005:i:125:p:103-131 Save to MyIDEAS - Hambuckers, J. & Ulm, M. (2023): On the role of interest rate differentials in the dynamic asymmetry of exchange rates
Motivated by the lack of empirical evidence in favour of the uncovered interest rate parity rule, we revisit the informational content of interest rate differentials (IRD) to explain daily exchange rates variations. Proposing a novel version of a GARCH model, we allow for the IRD to impact on the time-varying conditional asymmetry of the depreciation rate. ... These findings empirically support currency crash theories, suggesting that the larger the difference between interest rates, the more likely the high-yield currency appreciates on average but also exhibits greater risk of a large depreciation.
RePEc:eee:ecmode:v:129:y:2023:i:c:s0264999323003668 Save to MyIDEAS - Umar Bida Ndako & Mobolaji Hakeem I. (2015): Real Exchange Rates and Real Interest Rates Differential: Evidence from Nigeria
The theoretical relationship of the long-run equilibrium between real exchange rates and interest rate differentials is essentially derived from the Purchasing Power Parity (PPP) and the uncovered interest parity. ... While several authors are able to establish the long-run relationship between real exchange rates and interest rate differentials other could not found this relationship. ... The estimates suggest the existence of long-run relationship between real exchange rate, interest rate differential and foreign exchange reserves. ... However, the effect of interest rate differential is negative and statistically significant. On the short run dynamics, the finding indicates a non-monotonic relationship between real exchange rate, interest rate differential and foreign exchange reserves.
RePEc:arp:ijefrr:2015:p:65-75 Save to MyIDEAS - Ofori, Isaac Kwesi & Armah, Mark Kojo (2021): A re-examination of the exchange rate – interest rate differential relationship in Ghana
This paper revisits the exchange rate and interest rate differential relationship since Ghana adopted the inflation targeting regime. ... Further, we show a positive but slow responsiveness of exchange rate to interest rate differential shocks from the short-run to medium term. The long-run result however shows a case of a strong and significant response of exchange rate to interest rate differential shocks. We recommend that the Bank of Ghana address perennial macroeconomic instability, especially on inflation which we conjecture to fuel investment uncertainty and investment insensitivity to interest rate.
RePEc:pra:mprapa:107586 Save to MyIDEAS