Convergence in Interest and Exchange Rates

1
Convergence in Interest and Exchange Rates
Oxana Babetskaia-Kukharchuk Sekce menová a
statistiky CNB Odbor vnejích ekonomických vztahu
Seminár odboru 31 Financní politiky,
MF Aktuální Otázky Makroekonomického Vývoje
CR- Zkuenosti Po Vstupu Do EU 6. Prosince
2005
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Outline

• Motivation
• Convergence in exchange rates Data and
  methodology
• Interest rates convergence Results
• Conclusion

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Motivation

• How narrow are CE-4 interest rate differential
  with Euro area?
• How close are CE-4 currencies de facto to Euro?

4
Interest rates Data

• 1 year Bloomberg, Dec.1998-Sep.2005, daily

Euro Area Interbank Offered Rate (EURIBOR), the
Prague Interbank Offered Rate (PRIBOR), the
Budapest Interbank Offered Rate (BUBOR), the
Warsaw Interbank Offer/Bid Rate (WIBO) and the
Bratislava Interbank Offered Rate (BRIBOR)

• 5 years Bloomberg, Dec.1998-Sep.2005, daily

Government bonds

• 10 years Eurostat. Jan.1990-Aug.2005, monthly
• EMU convergence criterion bond yields

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Differences in interest rates vis-à-vis the euro
area 19982005
(percentage points)
One-year rates
Five-year rates
Sources Bloomberg, CNB calculation.
6
EMU convergence criterion bond yields
Sources Eurostat, CNB calculation.
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Stylized facts Euro and Dollar exchange rates in
CE-4
Exchange rates
(weekly, 1st week 2003100)
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Formal analysis of exchange rate co-movements

• Data Bloomberg, 01/01/1994 30/08/2005, Daily
• Methodology time varying correlation coefficient
• (estimated as bi-variate GARCH)
• where NC national currency
• Possible outcomes 0 lt corr lt 1
• corr 0 NC is not related
  to Euro at all
• corr 1 NC Euro

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Results Dynamic correlations
HUF/USD and EUR/USD
CZK/USD and EUR/USD
SKK/USD and EUR/USD
PLZ/USD and EUR/USD
Sources Bloomberg, CNB calculation.
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Conclusions
Exchange Rates
Interest Rates

• Czech Republic and Slovak Republic have the
  lowest interest rates differential
• Current average level in CE-4 is comparable to
  the time-corresponding level in Portugal

• Czech and Slovak koruna have a higher and less
  volatile correlation with the euro
• CE-4 currencies tend to be perceived close to
  Euro and similar among themselves
• Factors which may explain converge
• - Euro as the mean of trade invoicing
• - implicit role of Euro as the reference
  currency
• - intraregional trade
• ltEurope 70-80gt

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• Thank you for your attention !

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• Záloní snímky

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Dynamic correlation coefficient Sensitivity
checking

• United Kingdom opt-out clause in EMU
• Russia no plans for Euro

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Dynamic correlation coefficient