Convergence in
Interest and Exchange Rates
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. Prosince 2005
Outline
• Motivation
• Convergence in exchange rates
• Interest rates convergence
Data and methodology
Results
• Conclusion
2
Motivation
• How narrow are CE-4 interest rate differential with Euro area?
• How close are CE-4 currencies de facto to Euro?
3
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
4
Differences in interest rates vis-à-vis the euro area 1998–2005
(percentage points)
One-year rates
Five-year rates
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
1998
1999
2000
CZ
2001
HU
2002
2003
PL
2004
SK
Sources: Bloomberg, CNB calculation.
-2
1998
1999
CZ
2000
2001
HU
2002
2003
PL
2004
SK
5
EMU convergence criterion bond yields
18
AT
GR
14
PT
CZ
12
HU
PL
10
SK
16
8
6
4
2
0
-2
-4
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Sources: Eurostat, CNB calculation.
6
Exchange rates
Stylized facts: Euro and Dollar exchange rates in CE-4
(weekly, 1st week 2003=100)
130
110
120
100
110
100
90
90
80
70
1/08/03
CZK/EUR
PLN/EUR
SKK/EUR
HUF/EUR
EUR/USD
80
12/24/03
12/08/04
70
1/08/03
CZK/USD
PLN/USD
SKK/USD
HUF/USD
EUR/USD
12/24/03
12/08/04
7
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)
corr 
cov NC / USD, EUR / USDt
var NC / USDt * var EUR / USDt
where NC = national currency
• Possible outcomes: 0 <= |corr| <= 1
corr = 0: NC is not related to Euro at all
corr = 1: NC = Euro
8
Results: Dynamic correlations
Sources: Bloomberg, CNB calculation.
2002
2003
2004
2005
2002
2003
2004
2005
2001
2000
1998
1999
2001
2000
1999
-0.4
1998
-0.4
1997
-0.2
1996
-0.2
2005
0
2004
0
2003
0.2
2002
0.2
2001
0.4
2000
0.4
1999
0.6
1998
0.6
1997
0.8
1996
0.8
1995
1
1994
1
1995
SKK/USD and EUR/USD
1994
PLZ/USD and EUR/USD
1997
-0.4
1996
-0.4
1994
-0.2
2005
-0.2
2004
0
2003
0
2002
0.2
2001
0.2
2000
0.4
1999
0.4
1998
0.6
1997
0.6
1996
0.8
1995
0.8
1994
1
1995
HUF/USD and EUR/USD
CZK/USD and EUR/USD
1
9
Conclusions
Interest Rates
• Czech Republic and Slovak
Republic have the lowest interest
rates differential
• Current average level in CE-4 is
comparable to the timecorresponding level in Portugal
Exchange Rates
• 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%>
10
Thank you for your attention !
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