ConvergenceConvergence in in InterestInterest andand ExchangeExchange RatesRates

Seminář odboru 31 – Finanční politiky, MF

Aktuální Otázky Makroekonomického Vývoje ČR- Zkušenosti Po Vstupu Do EU

6. Prosince 2005

Oxana Babetskaia-Kukharchuk

Sekce měnová a statistiky ČNB Odbor vnějších ekonomických vztahů

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OutlineOutline

• Motivation

• Convergence in exchange rates Data and methodology

• Interest rates convergence Results

• Conclusion

3

MotivationMotivation

• How narrow are CE-4 interest rate differential with Euro area?

• How close are CE-4 currencies de facto to Euro?

4

Interest rates Interest rates

DataData

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

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

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

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)

Government bonds

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Differences in interest rates vis-à-vis the euro area 1998–2005Differences in interest rates vis-à-vis the euro area 1998–2005

-2

0

2

4

6

8

10

12

14

1998 1999 2000 2001 2002 2003 2004

CZ HU PL SK

Sources: Bloomberg, CNB calculation.

-2

0

2

4

6

8

10

12

14

1998 1999 2000 2001 2002 2003 2004

CZ HU PL SK

(percentage points)

One-year rates Five-year rates

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EMU convergence criterion bond yields

-4

-2

0

2

4

6

8

10

12

14

16

18

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AT GR

PT CZ

HU PL

SK

Sources: Eurostat, CNB calculation.

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Stylized facts: Euro and Dollar exchange rates in CE-4Stylized facts: Euro and Dollar exchange rates in CE-4

70

80

90

100

110

120

130

1/08/03 12/24/03 12/08/04

CZK/EURPLN/EURSKK/EURHUF/EUREUR/USD 70

80

90

100

110

1/08/03 12/24/03 12/08/04

CZK/USDPLN/USDSKK/USDHUF/USDEUR/USD

70

80

90

100

110

120

130

1/08/03 12/24/03 12/08/04

CZK/EURPLN/EURSKK/EURHUF/EUREUR/USD 70

80

90

100

110

1/08/03 12/24/03 12/08/04

CZK/USDPLN/USDSKK/USDHUF/USDEUR/USD

(weekly, 1st week 2003=100)(weekly, 1st week 2003=100)

Exchange ratesExchange rates

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Formal analysis of exchange rate co-movementsFormal 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

tt

t

USDEURUSDNCUSDEURUSDNC

corr/var*/var

/,/cov

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-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Results: Dynamic correlationsResults: Dynamic correlations

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

CZK/USD and EUR/USD HUF/USD and EUR/USD

SKK/USD and EUR/USDPLZ/USD and EUR/USD

Sources: Bloomberg, CNB calculation.

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ConclusionsConclusions

• 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%>

Interest Rates Exchange Rates

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Thank you for your attention !