Convergence in InterestandExchangeRates Oxana Babetskaia-Kukharchuk Sekce měnová a statistiky ČNB Odbor vnějších ekonomických vztahů Seminář odboru 31 – Finanční politiky, MF Aktuální Otázky Makroekonomického Vývoje ČR- Zkušenosti Po Vstupu Do EU 6. Prosince2005
Motivation Convergence in exchange rates Data and methodology Interest rates convergence Results Conclusion Outline
Motivation • How narrow are CE-4 interest rate differential with Euro area? • How close are CE-4 currencies de facto to Euro?
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
Differences in interest rates vis-à-vis the euro area 1998–2005 (percentage points) One-year rates Five-year rates Sources: Bloomberg, CNB calculation.
EMU convergence criterion bond yields Sources: Eurostat, CNB calculation.
Stylized facts: Euro and Dollar exchange rates in CE-4 Exchange rates (weekly, 1st week 2003=100)
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 <= |corr| <= 1 corr = 0: NC is not related to Euro at all corr = 1: NC = Euro
Results: Dynamic correlations HUF/USD and EUR/USD CZK/USD and EUR/USD PLZ/USD and EUR/USD SKK/USD and EUR/USD Sources: Bloomberg, CNB calculation.
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 <Europe: 70-80%> Conclusions Exchange Rates Interest Rates