Interest Rate Volatility Prior to Monetary Union under Alternative Pre‐Switch Regimes

Bernd Wilfling

German Economic Review, 2003, vol. 4, issue 4, 433-457

Abstract: Abstract. The volatility of interest rates is relevant for many financial applications. Under realistic assumptions the term structure of interest rate differentials provides an important predictor of the term structure of interest rates. This paper derives the term structure of differentials in a situation in which two open economies plan to enter a monetary union in the future. Two systems of floating exchange rates prior to the union are considered, namely a free‐float and a managed‐float regime. The volatility processes of arbitrary‐term differentials under the respective pre‐switch arrangements are compared. The paper elaborates the singularity of extremely short‐term (i.e. instantaneous) interest rates under extensive leaning‐against‐the‐wind interventions and discusses policy issues.

Date: 2003
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https://doi.org/10.1111/j.1465-6485.2003.00088.x

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Journal Article: Interest Rate Volatility Prior to Monetary Union under Alternative Pre-Switch Regimes (2003)
Working Paper: Interest Rate Volatility Prior to Monetary Union Under Alternative Pre-Switch Regimes (2001)
Working Paper: Interest rate volatility prior to monetary union under alternative pre-switch regimes (2001)
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German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin

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