Interest Rate Volatility Prior to Monetary Union under Alternative Pre-Switch Regimes
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Bernd Wilfling
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.
© 2019 by Walter de Gruyter Berlin/Boston
Articles in the same Issue
- The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials
- Interest Rate Volatility Prior to Monetary Union under Alternative Pre-Switch Regimes
- The Biological Standard of Living in the Two Germanies
- Unemployment, Factor Substitution and Capital Formation
- Buyer Subsidies in an Equilibrium Model of Price Dispersion
Articles in the same Issue
- The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials
- Interest Rate Volatility Prior to Monetary Union under Alternative Pre-Switch Regimes
- The Biological Standard of Living in the Two Germanies
- Unemployment, Factor Substitution and Capital Formation
- Buyer Subsidies in an Equilibrium Model of Price Dispersion
