Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries

Vincent Bouvatier

Economics Bulletin, 2007, vol. 5, issue 6, 1-14

Abstract: This paper investigates the relationship between international interest rate differentials and the risk premium during the 1997-1998 Asian crisis. Variables standing for the accumulation of imbalances in the monetary sector are used as proxies for the risk premium. We show,using a Vector Error Correction Model (VECM) on monthly data from January 1994 to December 2002, that the international interest rate differentials are driven by the risk premium indicators. This result explains the temporary inability of high interest rates to support exchange rates. However, the risk premium considered in this paper would have been required regardless of the interest rate policy. Consequently, high interest rates helped to prevent exchange rates from depreciating more.

JEL-codes: E4 F3 (search for similar items in EconPapers)
Date: 2007-02-21
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Citations: View citations in EconPapers (7)

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