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Volume :24 Issue : 95 1999      Add To Cart                                                                    Download

AN INTEREST RATE MODEL FOR KUWAIT AND THE IMPLICATIONS ON MONETARY POLICY

Auther : Dr. Ahmad S. Al-Refai

 

A short run empirical model is constructed to examine the determinants of interest rates within a small economy. A GARCH-M approach is used, and the evidence points to the possibility of a time varying risk premium. This might be an indication of misspecification. The model is also rested for a structural shift, which coincides with the Iraqi threat in the latter half of 1994.

The Chow test is used, and the null hypothesis of non-structural shift is rejected. The findings indicate that volatility was higher in the second interval, but persistence declined. There are indications also that the monetary policy might have become more credible in the latter period. Nevertheless, there are strong signs that the capital market is inefficient. Further, a caution is in order for researchers treating the domestic market as fully open. The paper is concluded with a suggestion to take serious steps to liberalize the economy.

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