The Economics of the Uncovered Interest Parity Condition for Emerging Markets

In this paper we investigate the real interest parity condition in ten Eastern European transition countries during 1997-2009 period. Our sample is interesting for three reasons: It covers the second stage of economic transition in the aftermath of the collapse of socialism; the establishment of Euroland at the turn of the century: and enlargement of Euroland to include the Eastern European countries of Slovenia and Slovakia. The data enables us to investigate how the introduction of market mechanisms in the early nineties and the establishment and enlargement of Euroland acted on real interest rate convergence. We test the real interest parity condition with unit root test with and without structural breaks. Inflationary expectations are estimated in two ways: (i) under assumption of rational expectations with ex-post inflation rates and (ii) with ex-ante estimated inflation expectation using ARIMA/ARCH model. Preliminary results suggest that there is a strong evidence of stationarity and relatively weaker evidence of structural breaks.

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“…For obvious reasons, Figure 7 presents LM unit root results only for 12 series that were (1) I in the ADF unit root test.…”

Section: Results Of the Amsler And Lee (1995) Single Break Lm Test Armentioning

confidence: 99%

Real Interest Parity in New Europe

Sonora

Tica

2014

Eastern European Economics

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“…We therefore investigate UIP using several maturities. 6 More details of progress in this area can be found in recent surveys, such as Chinn andMeredith (2004, 2005), Pasricha (2006), and Alper et al (2009).…”

Section: Literature Reviewmentioning

confidence: 99%

Testing uncovered interest rate parity using LIBOR

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. (2007), we find that UIP holds for shortterm maturities, when market-specific heterogeneity is controlled for. Furthermore, the estimation results show that the speed of adjustment to the long-run equilibrium is proportional to the maturity of the underlying instrument. Terms of use: Documents in EconStor mayJEL-Code: G120, G150, F310.

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“…The Wald test shows that we cannot reject the null hypothesis that all lag coefficients are zero. That may be because, as argued in Alper et al (2009), higher inflation in developing countries generates predictable common trends in both exchange rate depreciation and interest rates.…”

Section: Rational Expectationmentioning

confidence: 99%

“…Alper et al (2009) (Note 2) provide a review of the UIP literature in emerging economies and concluded that most studies dealing with data from emerging countries have found more favorable results for the UIP hypothesis. In addition, results on the test of the UIP hypothesis using interest rate differentials may not be the appropriate method to estimate whether there is a forward premium puzzle (Frankel & Poonawala, 2010).…”

Section: Introductionmentioning

confidence: 99%

Testing the UIP Hypothesis-Using Data from Partially Dollarized Developing Countries

Mengistu

2014

IJEF

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Unlike studies relying on data from industrial countries, recent studies using data from partially dollarized developing countries have found a favorable result to the uncovered interest parity hypothesis (UIP). In this paper, we test the robustness of these results using data from partially dollarized countries with higher and more volatile inflation rate (Tanzania and Uganda) than the countries covered in previous literature on developing countries. We find that UIP does not hold in Uganda and Tanzania. In fact, unlike previous studies on developing countries, we find that the currency with the higher interest rate appreciates, i.e., there is a forward premium puzzle. We also find that the coefficients will be less biased if we use international dollar interest rates rather than domestic ones. This tells us that capital controls do not play much of a role in these countries. In addition, we test whether the higher liquidity of the currencies of trading partners will improve results in favor of UIP. The results do not provide a clear conclusion. We find less bias when using the Kenyan shilling and more bias when using the South African rand compared to the U.S. dollar.

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The Economics of the Uncovered Interest Parity Condition for Emerging Markets

Cited by 45 publications

References 87 publications

Real Interest Parity in New Europe

Real Interest Parity in New Europe

Testing uncovered interest rate parity using LIBOR

Testing the UIP Hypothesis-Using Data from Partially Dollarized Developing Countries

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