Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries

Economics Bulletin, Vol. 5, No. 6 pp. 1-14, 2007

14 Pages Posted: 4 Feb 2011

See all articles by Vincent Bouvatier

Vincent Bouvatier

University Paris-Est Créteil (UPEC) - ERUDITE

Date Written: February 21, 2007

Abstract

This paper investigates the relationship between international interest rate differentials and the risk premium during the 1997-1998 Asian crisis. Variables standing for the accumulation of imbalances in the monetary sector are used as proxies for the risk premium. We show,using a Vector Error Correction Model (VECM) on monthly data from January 1994 to December 2002, that the international interest rate differentials are driven by the risk premium indicators. This result explains the temporary inability of high interest rates to support exchange rates. However, the risk premium considered in this paper would have been required regardless of the interest rate policy. Consequently, high interest rates helped to prevent exchange rates from depreciating more.

Keywords: interest rate, risk premium, Asian countries, VECM

JEL Classification: E4, F3

Suggested Citation

Bouvatier, Vincent, Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries (February 21, 2007). Economics Bulletin, Vol. 5, No. 6 pp. 1-14, 2007. Available at SSRN: https://ssrn.com/abstract=1754422

Vincent Bouvatier (Contact Author)

University Paris-Est Créteil (UPEC) - ERUDITE ( email )

Mail des Mèches
61 avenue du Général de Gaulle
Créteil Cedex, 94010
France

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