Uncovered interest parity<i>puzzle:</i>does it really exist?

Mylonidis, Nikolaos; Semertzidou, Maria

doi:10.1080/00036840902762696

Cited by 6 publications

(3 citation statements)

References 5 publications

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“…Cointegration tests of the PPP relation have been equally inconclusive (Taylor, 1988 , 1992 ; McNown and Wallace, 1990 ; Kim, 1990 ). As for UIP, most studies have reported that the interest rate differential is not an optimal predictor of exchange rate changes (Cumby and Obstfeld, 1981 ; Taylor, 1987 ; Mylonidis and Semertzidou, 2010 ; Londono and Zhou, 2017 ). A large number of empirical studies have been unable to solve the Meese-Rogoff puzzle, namely the fact that random walk models outperform any other exchange rate models in out-of-sample forecasting (Meese and Rogoff, 1983 ), although Mark ( 1995 ) reports that there is an economically significant predicable component (driven by relative money supply and real income) in long-horizon changes (short-horizon changes being dominated by noise instead).…”

Section: Literature Reviewmentioning

confidence: 99%

Exchange rate parities and Taylor rule deviations

Anderl

Caporale

2022

Empir Econ

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This paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflation-targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeting ones (the USA, the Euro Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarized as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities, thereby reducing deviations of the exchange rate from the PPP- and UIP-implied equilibrium.

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Section: Literature Reviewmentioning

confidence: 99%

Exchange rate parities and Taylor rule deviations

Anderl

Caporale

2022

Empir Econ

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“…Cointegration tests of the PPP relation have been equally inconclusive (Taylor, 1988;McNown and Wallace, 1990;Kim, 1990;Taylor, 1992). As for UIP, most studies have reported that the interest rate differential is not an optimal predictor of exchange rate changes (Cumby and Obstfeld, 1981;Taylor, 1987;Mylonidis and Semertzidou, 2010;Londono and Zhou, 2017).…”

Section: Literature Reviewmentioning

confidence: 99%

Exchange Rate Parities and Taylor Rule Deviations

Anderl

Caporale

2021

SSRN Journal

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This paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflationtargeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three nontargeting ones (the US, the Euro-Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarised as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities thereby reducing deviations of the exchange rate from the PPP-and UIPimplied equilibrium.

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“…Among the studies in Table 1, evidence for the validity of the IRP was given by Sharpe (1984) for Australia; Committeri, Rossi, and Santorelli (1993) for Italy, Germany, and the USA; Berument and Günay (2003) for Turkey; Chin and Liang (2009) for the USA, the UK, and Germany; Batten and Szilagyi (2010) for the USA and Japan; Guender and Cook (2011) for Australia and New Zealand; Kim and Cho (2011) for the USA, Japan, the UK, Singapore, Korea, Malaysia, and Thailand; Lothian (2016) for 17 various countries. Meanwhile, the IRP hypothesis was proven to be invalid by the studies of Moosa (1996) for Australia and New Zealand; Francis et al (2002) for nine developing market economies; Adrangi et al (2007) for Korea, the Philippines, and Thailand; Mylonidis and Semertzidou (2010) for the USA, Canada, Australia, and Japan; Lily et al (2011) for Malaysia; Tse and Wald (2013) for 18 various countries and Fukuda (2016) for the USA and Japan. An analysis of the studies within the scope of the literature review shows that these studies grouped factors such as development level, region, country, or index of openness and as a result, there is no consensus on the validity of the IRP hypothesis due to the different methods and approaches that were used.…”

Section: Empirical Literaturementioning

confidence: 99%

The Interest Rate Parity in Fragile Five Countries: Evidence from Unit Root Tests with Breaks

Altuntaş¹

2021

jepr

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This study analyzes the validity of the uncovered interest rate parity for Brazil, India, Indonesia, South Africa, and Turkey, which are grouped as The Fragile Five countries within the literature. The econometric analysis section of the study benefits from unit root tests, a common method that researchers have started to utilize recently. For this reason, we used Fuller (1979), Augmented Dickey andFuller (1981), Philips and Perron (1988), Kwiatkowski et al. (1992), Perron (1989) unit root test with one break, Zivot and Andrews (1992) unit root test with one break, and Enders and Lee (2012) Fourier-ADF unit root tests. In line with the results of the analysis, we obtained strong evidence regarding the validity of the uncovered interest rate parity for Brazil, Indonesia, and Turkey. Results for India vary according to the structure of the break and where the structural break is taken into consideration. This shows that structural breaks and the economic circumstances of the period that the data set is from should be considered. Although results for South Africa show that interest rate parity is generally valid, results for the Fourier-ADF test, which allows for smooth breaks, offered evidence that the interest rate parity was not valid in these countries.

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Uncovered interest paritypuzzle:does it really exist?

Cited by 6 publications

References 5 publications

Exchange rate parities and Taylor rule deviations

Exchange rate parities and Taylor rule deviations

Exchange Rate Parities and Taylor Rule Deviations

The Interest Rate Parity in Fragile Five Countries: Evidence from Unit Root Tests with Breaks

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