ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE
This paper provides a closer view on the interaction of exchange rate volatility and interest rate volatility in the Mercosur countries. We discuss several models that explain systematic correlations between the movements of both variables and their second statistical moments, i.e. their volatilitie...
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| Autores principales: | , , |
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| Lenguaje: | English |
| Publicado: |
Instituto de Economía, Pontificia Universidad Católica de Chile
2004
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| Materias: | |
| Acceso en línea: | http://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0717-68212004012200002 |
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| Sumario: | This paper provides a closer view on the interaction of exchange rate volatility and interest rate volatility in the Mercosur countries. We discuss several models that explain systematic correlations between the movements of both variables and their second statistical moments, i.e. their volatilities. In contrast to the "fear of floating" argument that could lead to a volatility trade-off, we argue that both variables are largely driven either by the credibility of a country or by politics in general and thus should move in the same direction. Subsequently, we test this hypothesis of a positive correlation between both variables empirically. As a final step, we control for the impact of third variables such as exchange rate misalignment, financial stress, and monetary volatility. Our results show that _independent from third variables_there is a notable co-movement of exchange rates and interest rates in Mercosur countries |
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