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The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials

Peter Tillmann

No 02/2001, IWP Discussion Paper Series from Institute for Economic Policy, Cologne, Germany

Abstract: Once you allow for persistence in macroeconomic variables, two aspects of exchange rate credibility emerge whose relative importance can vary over time. Hence, the effect of policy measures on interest rate differentials becomes ambiguous. In this paper, a Markov-switching VAR that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent determination of credibility for major EMS countries. The model separates two regimes that are distinct with respect to the time series properties of the interest rate spread. Regime-dependent impulse response functions reveal substantial differences in the response of spreads to macroeconomic shocks across regimes.

Keywords: Regime-switching; VAR; interest rate differentials; regime-dependent impulse response functions; credibility (search for similar items in EconPapers)
JEL-codes: E4 F3 (search for similar items in EconPapers)
Date: 2001-05
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Citations: View citations in EconPapers (2)

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