SFB 303 Discussion Paper No. B-295
Author:
Henry, Jerome, and Jens Weidmann
Title: The French-German Interest Rate Differential since German Unification:
The Impact of the 1992 and 1993 EMS Crisis
Abstract: The EMS crisis of 1992-1993, which resulted in the widening of the
exchange rate bands, may have had some impact on the long-run structure of
the system consisting of daily 1-month-Eurorates on German Mark, US-Dollar
and French Franc. First, we find that both the US Eurorate and the German-French Eurorate differential are stationary over the December 1990 to
December 1993 period, within a Gaussian VAR. Second, using GARCH-models to
account for heteroskedasticity it is demonstrated that Gaussian models can
induce a misleading interpretation of the linkages, namely about the effects
of the American rate on the French one. In spite of the crisis and the
changes in the ERM, the volatility parameters for the German-French interest
rate differential are quite stable over the sample. This can be related to
the observation that the July 1993 crisis is not linked to a specifically
high volatility.
Keywords: Interest rates, Cointegration, Heteroskedasticity, GARCH, EMS,
Asymmetry in the ERM
JEL-Classification-Number: F33, E43, C32
Creation-Date: December 1994
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