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:	BELKE,ANGAR, GEISSLREITHER,KAI, GROS,DANIEL
Lenguaje:	English
Publicado:	Instituto de Economía, Pontificia Universidad Católica de Chile 2004
Materias:	Currency Union Exchange Rate and Interest Rate Variability Volatility Trade-off Mercosur
Acceso en línea:	http://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0717-68212004012200002
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spelling	oai:scielo:S0717-682120040122000022004-05-31ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONEBELKE,ANGARGEISSLREITHER,KAIGROS,DANIEL Currency Union Exchange Rate and Interest Rate Variability Volatility Trade-off Mercosur 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 countriesinfo:eu-repo/semantics/openAccessInstituto de Economía, Pontificia Universidad Católica de ChileCuadernos de economía v.41 n.122 20042004-04-01text/htmlhttp://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0717-68212004012200002en10.4067/S0717-68212004012200002
institution	Scielo Chile
collection	Scielo Chile
language	English
topic	Currency Union Exchange Rate and Interest Rate Variability Volatility Trade-off Mercosur
spellingShingle	Currency Union Exchange Rate and Interest Rate Variability Volatility Trade-off Mercosur BELKE,ANGAR GEISSLREITHER,KAI GROS,DANIEL ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE
description	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
author	BELKE,ANGAR GEISSLREITHER,KAI GROS,DANIEL
author_facet	BELKE,ANGAR GEISSLREITHER,KAI GROS,DANIEL
author_sort	BELKE,ANGAR
title	ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE
title_short	ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE
title_full	ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE
title_fullStr	ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE
title_full_unstemmed	ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE
title_sort	on the realtionship between exchanges rates and interest rates: evidence from the southern cone
publisher	Instituto de Economía, Pontificia Universidad Católica de Chile
publishDate	2004
url	http://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0717-68212004012200002
work_keys_str_mv	AT belkeangar ontherealtionshipbetweenexchangesratesandinterestratesevidencefromthesoutherncone AT geisslreitherkai ontherealtionshipbetweenexchangesratesandinterestratesevidencefromthesoutherncone AT grosdaniel ontherealtionshipbetweenexchangesratesandinterestratesevidencefromthesoutherncone
_version_	1718442393278087168

ON THE REALTIONSHIP BETWEEN EXCHANGES RATES AND INTEREST RATES: EVIDENCE FROM THE SOUTHERN CONE

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