Dynamic integration and transmission channels among interest rates and oil price shocks

Urom, christian and Guesmi, Khaled and abid, ilyes and Dagher, Leila (2020): Dynamic integration and transmission channels among interest rates and oil price shocks. Published in: The Quarterly Review of Economics and Finance (2021): pp. 1-22.

Abstract

This paper examines the short term dynamic integration among oil price shocks and interest rates for the U.S.A, Euro area and twelve Asian economies from August 1999 to January 2018 using a Time-Varying Parameter Vector Autoregression (TVP-VAR) with stochastic volatility. First, we found convincing evidence of time variation in the co-movement of interest rates and oil shocks and that the integration levels were highest towards the 2001 financial crisis whereas there is an evidence of decoupling as shown by notable drop in the the level of integration during the 2007-2009 economic and Euro-debt crises. In descending order, Singapore, crude oil, Hong Kong, Philippines and the United States are the net-transmitters of shocks while India, Japan and Vietnam are net-receivers. Results from a sub-sample containing highly industrializing economies in Asia, the United States, Euro area and crude oil market suggest that Singapore, Hong Kong and the United States remained top transmitters of shocks whereas the Euro-area, Taiwan, Korea and crude oil market become net receivers of shocks. Results from the analysis of transmission channels suggest that higher integration for the full sample tend to be driven by increasing levels of external exposure through trade and financial linkages, information asymmetry and political stability while financial crisis reduces the level of integration. Lastly, among the highly industrialized markets, time varying integration is also driven by the degree of external exposure as well as both political and financial stability. We also document important policy implications of our findings.

• Item Type: MPRA Paper
• Language: English
• Keywords: Integration Volatility spillovers; Interest rates; Oil-price shocks; Linkages; External exposure/segmentation
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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