Interest Rate Volatility and Sudden Stops: An Empirical Investigation

Ricardo Reyes-Heroles and Gabriel Tenorio

No 1209, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using a multi-country regime-switching vector autoregressive (VAR) model we document the existence of two regimes in the volatility of interest rates at which emerging economies borrow from international financial markets, and study the statistical relationship of such regimes with episodes of sudden stops. Periods of high volatility tend to be persistent and are associated with high interest rates, the occurrence of sudden stops in external financing, and large declines in economic activity. Most strikingly, we show that regime switches drive the countercyclicality of interest rates in emerging markets documented in previous literature (Neumeyer and Perri, 2005) and that high-volatility regimes forecast sudden stops 6 and 12 months ahead.

Keywords: Volatility; Interest rates; Emerging market economies; Sudden stops; Markov regime switching (search for similar items in EconPapers)
JEL-codes: E3 E43 F34 F4 G12 G15 O11 O16 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017-07
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ore
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.federalreserve.gov/econres/ifdp/files/ifdp1209.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1209

DOI: 10.17016/IFDP.2017.1209

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().