International Interest Rates Research Articles

INTEREST RATE SPREADS AND EXCHANGE RATE VARIABILITY

Interest rate spreads in excess of those predicted by the uncovered interest rate parity condition are commonly observed. The pricing of exchange rate risk must be analyzed in order to understand international interest rate differentials. Moreover, it may also be important in order to evaluate how the establishment of a European Monetary Union affects real rates of interest. The authors show that risk premia depend on a country's consumption pattern, attitudes towards risk, competitive position, size, and debt position. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

Consumption and real exchange rates in dynamic economies with non-traded goods

We examine the possibility that non-traded goods may account for several striking features of international macroeconomic data: large, persistent deviations from purchasing power parity, small correlations of aggregate consumption fluctuations across countries, and substantial international real interest rate differentials. A dynamic, exchange economy is used to show that non-traded goods in principle can account for each of these phenomena. In the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates, but we find little evidence for this relation in time-series data for eight OECD countries.

International Interest Rate Linkages in the Term Structure

This paper considers one aspect of the relationship between returns on long-term bonds denominated in Canadian dollars issued by the Canadian federal government and long-term bonds denominated in American dollars issued by the American federal government. The difference between a component of the term premium in the Canadian dollar term structure and the same component of the term premium in the American dollar term structure is measured at three terms to maturity. The measurement compares ex ante excess returns earned on Canadian dollar long-term bonds and excess returns earned on American dollar long-term bonds. The evidence supports the existence of currency-specific term premia which vary over time. Copyright 1993 by Ohio State University Press.

Endogenous Creditor Seniority and External Debt Values

A new aggregation scheme used to measure the sources of fiscal financing of indebted countries suggests that the seniority of domestic debt improved at the expense of foreign bank debt during the late 1980s. This paper argues that this was the revenue-maximizing response of governments to capital flight that drained the domestic financial tax base subject to indirect taxation. Empirical analysis indicates that the profile of the sources of fiscal financing influenced external debt values. Econometric analysis implies that previous studies have neglected an important reason for the decline in loan values from 1985 to 1989: higher international interest rates.

Cointegration and capital market integration: An application of the error-correction mechanism to investigate the relationship between domestic and offshore U.S. dollar yields

In this study the author applies the theory of cointegration to an examination of the structure of international interest rates. U.S. dollar yields in domestic and offshore markets are studied for the period 1986–1987, inclusive. Primary findings reveal that the two yield series are cointegrated, the domestic market responds more rapidly than the offshore market to eliminate deviations from equilibrium, and the adjustment in domestic yields is accomplished by changes in both domestic yields and offshore yields; deviations from equilibrium in the offshore market are corrected solely by changes in domestic market yields.

Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors

The characteristics of recent capital inflows into Latin America are discussed. It is argued that these inflows are partly explained by conditions outside the region, like the recession in the United States and lower international interest rates. The importance of external factors suggests that a reversal of those conditions may lead to a future capital outflow, increasing the macroeconomic vulnerability of Latin American economies. Policy options, it is argued, are limited.

International interest rate linkages and the exchange rate regime

Return differentials between instruments denominated in Canadian dollars and instruments denominated in American dollars are investigated. The study compares the properties of return differentials in the period of fixed exchange rates during the 1960s and in the period of flexible exchange rates during the 1970s and 1980s. Both real and nominal return differentials are investigated. The results indicate that the change in exchange rate regime is not associated with a change in the average level of ex post return differentials between Canada and the United States. Models which predict ex ante return differentials from available information in a rational expectations framework show a surprisingly large amount of structural stability across the regime change. The major impact of the flexible exchange rate regime is on the variance of ex post return differentials and not on the average level of ex post or ex ante return differentials. (JEL E42, E58, G15).

Endogenous Creditor Seniority and External Debt Values

A new aggregation scheme used to measure the sources of fiscal financing of indebted countries suggests that there was a fundamental improvement in the seniority of domestic debt at the expense of foreign bank debt during the late 1980s. We argue that this was the revenue maximizing response of governments to internal and external capital flight that drained the domestic financial "tax base" subject to indirect taxation. Empirical analysis indicates that the profile of the sources of fiscal financing influenced external debt values. The econometric analysis also implies that previous studies have neglected an important reason for the decline in loan values from 1985 to 1989: the increase in international interest rates.

Long-term covered interest parity and the international swap market

This paper examines the pricing of long-term forward exchange contracts. It is established empirically that the traditional covered interest arbitrage pricing relationship is often violated, and that the behaviour of long- and short-term forward exchange rates is substantively different. It is argued that activity in the international currency and interest rate swap markets provides a potential explanation for the observed “mispricing”. In particular, fixed-to-fixed currency swaps provide another form of arbitrage which can affect long-term forward exchange pricing.

Endogenous Creditor Seniority and External Debt Values

A new aggregation scheme used to measure the sources of fiscal financing of indebted countries suggests that there was a fundamental improvement in the seniority of domestic debt at the expense of foreign bank debt during the late 1980s. We argue that this was the revenue maximizing response of governments to internal and external capital flight that drained the domestic financial “tax base” subject to indirect taxation. Empirical analysis indicates that the profile of the sources of fiscal financing influenced external debt values. The econometric analysis also implies that previous studies have neglected an important reason for the decline in loan values from 1985 to 1989: the increase in international interest rates.

Endogenous Creditor Seniority and External Debt Values

A new aggregation scheme used to measure the sources of fiscal financing of indebted countries suggests that there was a fundamental improvement in the seniority of domestic debt at the expense of foreign bank debt during the late 1980s. We argue that this was the revenue maximizing response of governments to internal and external capital flight that drained the domestic financial tax base subject to indirect taxation. Empirical analysis indicates that the profile of the sources of fiscal financing influenced external debt values. The econometric analysis also implies that previous studies have neglected an important reason for the decline in loan values from 1985 to 1989: the increase in international interest rates.

Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors

The characteristics of recent capital inflows into Latin America are discussed. It is argued that these inflows are partly explained by conditions outside the region, like recession in the United States and lower international interest rates. This suggests the possibility that a reversal of those conditions may lead to a future capital outflow, increasing the macroeconomic vulnerability of Latin American economies. Policy options are argued to be limited.

Corporate capital structure and taxes in the Korean manufacturing sector

The Korean securities market is one of the fastest growing emerging capital markets in the world. It is also remarkable for its reliance on debt financing. The bond market accounts for 91.5 percent of the total fund raising activity, while the stock market accounts for only 8.5 percent. The emphasis on debt financing represents one of the major issues related to corporate financial poIicy in Korea. Factors suclt as persistently high international interest rates, foreign exchange rate fluctuations, inflation, international competition and indications of a slowdown in the world trade have led to increased pressure on the liquidity of many growth-oriented Korean firms, especially in the manufacturing sector. Demand for capital to finance rapid expansion needs has forced the leveraged firms to prefer short-term bank borrowing. The excessive use of short-term leverage and the need for improvements in capital structure of firms in Korea has led both researchers and policy makers to insist on reforms in the existing tax legislation. This study examines capita1 structure trends in Korean manufacturing firms with respect to taxes, inflation and interest rates. One aspect of this study is to extend IvEller’s (241 framework into the Korean tax and financial en~ronment, where there are several types of taxes that have implications on the corporate capital structure decisions. Another aspect of this study is the explicit consideration of the dual interest rates associated with corporate debt structures: one, the reguIated rate applied on special loans from the government agency banks; and the other, market interest rate applied to corporate bonds determined by market forces. The study also provides insight into some of the fundamental aspects of corporate capital structure for United States investors considering investment opportunities in the Korean manufacturing sector.

Japanese capital outflows

This paper investigates the causes of large Japanese long-term capital outflows in the 1980s. It is found that exchange rate expectations and international interest rate differentials explain part of the capital outflows until the mid 1980s, but not all. More significant were relaxation of capital controls and the rapid growth of institutional investors. Since the mid 1980s exchange rate expectations have exerted negative impacts on capital outflows. These have been more than offset by further relaxation of capital controls in 1986. However, the effects of deregulation are now close to over. Throughout the period increases in domestic wealth have been an important cause of capital outflows.

Some efficient tests of international real interest rate parity

(1990). Some efficient tests of international real interest rate parity. Applied Economics: Vol. 22, No. 8, pp. 1083-1092.

International Interest Rates, Exchange Rates, and the Stochastic Structure of Supply

ABSTRACTIn a dual‐currency, flexible exchange rate model, both nominal and real foreign exchange premia depend on investor risk attitudes, consumption parameters, and the stochastic structure of currency and commodity supplies. When supplies are random, their joint correlation structure determines the sign of the premia. If the money supplies are identically distributed, then all foreign exchange premia, regardless of the currency of denomination, are zero. A positive correlation between the value of a country's currency and its nominal interest rate need not indicate real interest rate movements. Relative bond prices can be negatively correlated with the terms of trade.

International Interest Rates, Exchange Rates, and the Stochastic Structure of Supply

International Interest Rates, Exchange Rates, and the Stochastic Structure of Supply

International portfolio nondiversification and exchange rate variability

Incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods. The model can also explain the greater correlation between consumption and income within a country than between consumption across countries. Nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment. The model is also consistent with international real interest rate differentials, changes over time in the current account and relative wealth across nations, and observed time-series properties of exchange rates.

La transmission des mouvements de taux d'intérêt : une analyse conjoncturelle

An analysis of the economic reasons for international interest rate movements must start with the basic relationship between interest and inflation rates. Another key factor in today's environment of few capital controls, is investors' preference for maximizing yields on any of the prin- international capital flows are thus moving toward the high-yielding currencies, notably the dollar. The dollar's appreciation is, however, slo-wing correction of the U.S. balance of payments deficit. In conclusion, today's anti-inflation battle by the major central banks is causing capital movements and exchange rate shifts which may adversely affect balance of payments adjustment. cipal markets. International capital movements, dwarfing commercial transactions, have become the driving force of international interest rate linkage. But the economic environment is now changing in the principal countries. The U.S., Japan and the key European countries are tightening monetary policy to block inflationary pressures caused by the long period of rapid economic growth,

Political vs. currency premia in international real interest rate differentials: Jeffrey A. Frankel and Alan T. MacArthur

Political vs. currency premia in international real interest rate differentials: Jeffrey A. Frankel and Alan T. MacArthur