Interest-rate volatility and volatility transmission in nine Latin American countries

Abstract

With US monetary policy and financial markets exerting a strong influence on the region’s exchange rates, exports and investor confidence, Latin America is particularly vulnerable to international macroeconomic ‘contagion.’ Of the limited studies on the region, however, most attention has been drawn to the largest economies. This study models monthly short-term nominal interest-rate volatility for nine Latin American countries and the US, examining whether this volatility spills over within the region. GARCH and exponential GARCH methods provide univariate analyses, and multivariate GARCH techniques test for contagion. Relatively few instances of contagion are uncovered, with Argentina and Chile the most affected by external events. Paraguay and Uruguay (as well as Brazil) are more immune, most likely due to capital controls. An expanded model that includes exchange-rate volatility suggests that direct interest-rate linkages are rare, and that spillovers are primarily transmitted through currency markets.

Keywords:

• interest-rate volatility
• Latin America
• contagion
• GARCH

JEL Classification:

• F41
• E43

Notes

¹  Economic events in other countries were also considered, but testing showed that other dummies were not significant.