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Modeling Nonlinear and Heterogeneous Dynamic Linkages in International Monetary Markets
Macroeconomic Dynamics (2012)
  • Mohamed Arouri
  • Duc Khuong Nguyen
  • Fredj Jawadi
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.
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Mohamed Arouri, Duc Khuong Nguyen and Fredj Jawadi. "Modeling Nonlinear and Heterogeneous Dynamic Linkages in International Monetary Markets" Macroeconomic Dynamics Vol. 16 Iss. S2 (2012)
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