a carregar...

GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 01 de 2015

   

Is There a Trade-off between Exchange Rate and Interest Rate Volatility?

Evidence from an M-GARCH Model

(Publicado no International Journal of Economic Sciences 1(1): 19-38, 2012)


António Portugal Duarte
Faculdade de Economia da Universidade de Coimbra e GEMF

João Sousa Andrade
Faculdade de Economia da Universidade de Coimbra e GEMF

Adelaide Duarte
Faculdade de Economia da Universidade de Coimbra e GEMF

Abstract:
One of the main implications of the basic target zone model developed by Krugman (1991) is that there is a trade-off between exchange rate volatility and interest rate differential volatility. Using an M-GARCH model we find evidence that such a trade-off existed, prior to the introduction of the euro, between the exchange rate and the interest rate differential among Portugal and Germany. This result reflects the increased credibility of the Portuguese monetary policy, due mainly to the modernisation of the banking and financial system and to the progress made in the disinflation process under an exchange rate target zone.


JEL Classification: C32, C51, F31, F41, G15.


Keywords: Credibility, disinflation, M-GARCH, volatility and target zones.

Download PDF

Download
(405 KB)