Decomposing Interest Differentials: An International Borrowing and Lending Approach

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Title Decomposing Interest Differentials: An International Borrowing and Lending Approach
Author Makin, Anthony John
Journal Name Journal of Economic Integration
Editor Myung-gun Choo
Year Published 2004
Place of publication Seoul, Korea
Publisher Center for International Economics, Sejong University
Abstract This paper proposes a new economy-wide framework for decomposing international interest differentials based on aggregate borrowing and lending behaviour in economies whose domestic capital markets are highly globally integrated. Using macroeconomic rather than microeconomic concepts, this alternative approach demonstrates how key inter-relationships involving relative inflation levels and exchange rate expectations govern “average” domestic and foreign interest differentials. It also contributes by identifying different kinds of risk premia that arise due to economy-wide factors such as the level of foreign debt and country and political factors. Unlike standard interest parity approaches, based simply on arbitrage of financial asset returns, it shows that changing exchange rate expectations influence international interest differentials through both excess domestic borrowing and foreign lending behaviour.
Peer Reviewed Yes
Published Yes
Publisher URI
Volume 19
Issue Number 1
Page from 192
Page to 203
ISSN 1225-651X
Date Accessioned 2006-07-10
Language en_AU
Faculty Griffith Business School
Subject PRE2009-Macroeconomic Theory
Publication Type Journal Articles (Refereed Article)
Publication Type Code c1x

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