Interest Rate Volatility Prior to Monetary Union Under Alternative Pre-Switch Regimes

Bernd Wilfling

No 26277, Discussion Paper Series from Hamburg Institute of International Economics

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 prediction 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 intervention policies and discusses empirical issues. Die Volatilität von Zinssätzen ist für viele Anwendungen aus den Bereichen der Finanzund Geldtheorie von Bedeutung. Unter realistischen Bedingungen liefert die zeitliche Struktur von Zinsdifferentialen eine wichtige Vorhersage für die Zinsstruktur. Diese Arbeit leitet die Zinsdifferentialstruktur in einer Situation her, in der zwei offene Volkswirtschaften in der Zukunft eine Währungsunion bilden wollen. Es werden zwei alternative Wechselkursregime vor der Währungsunion betrachtet und zwar ein "Reiner" sowie ein "Gemanagter Float". Das Papier vergleicht die Volatilitätsprozesse von Zinsdifferentialen beliebiger Fristigkeit unter den verschiedenen Wechselkurssystemen. Ferner stellt die Arbeit die singuläre Stellung extrem kurzfristiger (sogenannter instantaner) Zinssätze unter intensiven "leaning-against-the-wind" Interventionspolitiken heraus und diskutiert empirische Aspekte.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 27
Date: 2001
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Related works:
Journal Article: Interest Rate Volatility Prior to Monetary Union under Alternative Pre‐Switch Regimes (2003)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:hwwadp:26277

DOI: 10.22004/ag.econ.26277

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