Interest Rate Volatility and Sudden Stops: An Empirical Investigation

Reyes-Heroles, Ricardo; Tenorio, Gabriel

doi:10.17016/ifdp.2017.1209

Cited by 6 publications

(9 citation statements)

References 32 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…11 For business cycles in general, Neumeyer and Perri (2005) and Uribe and Yue (2006) consider the effects of shocks to the level of interest rates, while Fernández-Villaverde et al (2011) focus on the effects of shocks to their volatility. Reyes-Heroles and Tenorio (2017) focus on the effects of both shocks for sudden stops in particular. See Ahmed and Zlate (2013) for the effects on capital flows.…”

Section: 13mentioning

confidence: 99%

“…Following the approach by Reyes-Heroles and Tenorio (2017) to study the evolution of external interest rates around sudden stops, we allow for contemporaneous correlation and dynamic feedback between the exogenous output and interest rate processes. The random vector (z t , r t ) has the following VAR specification:…”

Section: Frameworkmentioning

confidence: 99%

“…As a reference, an alternative calibration target could have been the average net foreign asset to GDP ratio, which amounts to 27.8% of GDP in our sample. group of emerging markets using the maximum likelihood approach of Reyes-Heroles and Tenorio (2017), with the data corresponding to a sample of 10 EMEs. The only difference compared to Reyes-Heroles and Tenorio (2017) is that we use annual data, which better correspond to the timing of our model and existing literature.…”

Section: ∂Q(bb X) ∂Bmentioning

confidence: 99%

“…16 Reyes-Heroles and Tenorio (2017) provide an empirical account of the evolution of interest rates around sudden stops for a large sample of EMEs.…”

mentioning

confidence: 99%

See 3 more Smart Citations

Managing Capital Flows in the Presence of External Risks

Reyes-Heroles

Tenorio²

2017

internationalfinance

Self Cite

View full text Add to dashboard Cite

We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small open economy model subject to the risk of sudden stops-large recessions together with abrupt reversals in capital inflowsand characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a pecuniary externality that leads to "overborrowing" and sudden stops that arise when the constraints bind. The typical sudden stop generated by the model replicates existing empirical evidence for emerging market economies: Low and stable external interest rates reinforce "overborrowing" and lead to greater exposure to crises typically accompanied by abrupt increases in interest rates and a persistent rise in their volatility. We solve for the optimal policy and argue that the size of a tax on international borrowing that implements the policy depends on two factors, the incidence and the severity of potential future crises. We show quantitatively that these taxes respond to both the level and volatility of interest rates even though optimal decisions in the competitive equilibrium do not respond substantially to changes in volatility, and that the size of the optimal tax is non-monotonic with respect to external shocks.JEL classification: E3, E6, F3, F4, F6, G1, G2

show abstract

Section: 13mentioning

confidence: 99%

Section: Frameworkmentioning

confidence: 99%

Section: ∂Q(bb X) ∂Bmentioning

confidence: 99%

“…16 Reyes-Heroles and Tenorio (2017) provide an empirical account of the evolution of interest rates around sudden stops for a large sample of EMEs.…”

mentioning

confidence: 99%

See 2 more Smart Citations

Managing Capital Flows in the Presence of External Risks

Reyes-Heroles

Tenorio²

2017

internationalfinance

Self Cite

View full text Add to dashboard Cite

show abstract

“…In a recent study,Reyes-Heroles and Tenorio (2017) document the existence of two regimes in the volatility of interest rates at which emerging economies borrow and show that these regimes are closely related to the occurrence of sudden stops in these economies.…”

mentioning

confidence: 99%

Interest Rate Uncertainty and Sovereign Default Risk

2020

View full text Add to dashboard Cite

International data suggests that fluctuations in the level and volatility of the world interest rate (as measured by the US treasury bill rate) are positively correlated with both the level and volatility of sovereign spreads in emerging economies. We incorporate an estimated time-varying process for the world interest rate into a model of sovereign default calibrated to a panel of emerging economies. Time variation in the world interest rate interacts with default incentives in the model and leads to state contingent effects on borrowing and sovereign spreads which resemble those found in the data. The model delivers up to one-half of the positive comovement between the level and volatility of world interest rate and the level of sovereign spreads seen in emerging economies. Moreover, the model also delivers significant positive co-movements between the volatility of the spread and the process for the world interest rate which is also consistent with the data. Our model provides one potential source for the observed bunching in default probabilities observed across nations, namely the world interest rate process. Our model generates a positive and significant correlation (0.51) between the spreads of two nations with uncorrelated income processes. This is close to the observed mean correlation in the data (0.61).

show abstract

Interest Rate Volatility and Economic Growth in Nigeria: New Insight from the Quantile Autoregressive Distributed Lag (QARDL) Model

Olasehinde-Williams,

Omotosho,

Bekun

2024

J Knowl Econ

View full text Add to dashboard Cite

This is a study on interest rate volatility, a crucial form of volatility which affects local and foreign investments in the real and financial sectors. Whether to prioritize interest rate stability to prevent distortions in the market mechanism or to prioritize other macroeconomic objectives while allowing interest rates to independently react to market forces is a key question for Nigeria’s apex monetary authority. Answering this question is the primary motivation for this research. This paper is an attempt to establish the effect of interest rate volatility on economic growth and further conclude on the suitability of the financial liberalization policy in Nigeria. To reach an evidence-based conclusion, the paper analyzes the relationship between interest rate volatility and economic growth in Nigeria for the period 1981–2020. The QARDL procedure was employed to establish the short-run and long-run quantile-specific impacts of interest rate volatility. As a final step, Granger causality tests are conducted to investigate the predictive powers of the variables. It is discovered from the econometric analysis that interest rate volatility adversely affects the economic performance of Nigeria in both the short run and long run. Consequently, full liberalization is not suitable for the economy. Moreover, we find that the short-run adverse growth effect of interest rate volatility is greater when the economy is already in a relatively weak state, whereas the long-run adverse growth effect is greater when the economy is already in a relatively strong position. The findings sufficiently prove that full interest rate liberalization is not Pareto efficient for Nigeria. Hence, greater supervision of the interest rate corridor system to reduce volatility in the rates and minimize chances of persistent upward or downward bias is advised. Study limitations and directions for further research are also provided.

show abstract

Interest Rate Volatility and Sudden Stops: An Empirical Investigation

Cited by 6 publications

References 32 publications

Managing Capital Flows in the Presence of External Risks

Managing Capital Flows in the Presence of External Risks

Interest Rate Uncertainty and Sovereign Default Risk

Interest Rate Volatility and Economic Growth in Nigeria: New Insight from the Quantile Autoregressive Distributed Lag (QARDL) Model

Contact Info

Product

Resources

About