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    Fiscal, monetary policy and the conditional risk premium in short-term interest rate differentials: an application of Tobin’s portfolio theory


    Flavin, Thomas and Limosani, M.G. (2007) Fiscal, monetary policy and the conditional risk premium in short-term interest rate differentials: an application of Tobin’s portfolio theory. International Review of Economics and Finance, 16. pp. 101-112. ISSN 1059-0560

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    Abstract

    This paper proposes a Multivariate-Arch in Mean model to analyze the potential channels through which domestic fiscal and monetary policy as well as changes in the international economic environment may affect interest rate differentials across countries. This technique is illustrated by analyzing the behavior of short-term interest rates in a number of European countries prior to the introduction of the common currency. The key feature of our results is that macroeconomic variables exert both a direct and indirect influence on the shortterm interest rate differential. This indirect effect is captured through the conditional volatility of the differential, which is itself a statistically significant determinant of the level of the differential. This relationship is likely to be overlooked by more traditional models that focus solely on the first order moments of the process.

    Item Type: Article
    Keywords: Interest rate differentials; Macroeconomic effects; M-GARCH;
    Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
    Item ID: 8003
    Identification Number: https://doi.org/10.1016/j.iref.2004.10.006
    Depositing User: Thomas Flavin
    Date Deposited: 07 Mar 2017 17:40
    Journal or Publication Title: International Review of Economics and Finance
    Publisher: Elsevier
    Refereed: Yes
    URI:

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