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Testing Interest Rate Parity and Rational Expectations for Canada and the United States

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  • Allan W. Gregory

Abstract

The purpose of this paper is to examine the joint hypothesis of interest-rate parity and rational expectations for Canada a nd the United States using monthly data. Two approaches to testing are considere d: (1) the substitution method and (2) testing the cross- equation nonlinear rati onal expectations restrictions from solving the interest-rate parity equation. It is demonstrated that standard application of the substitution method requires the assumption that the interest-rate parity equation holds deterministically. Tests for unit roots in the spot exchange-rate and interest-rate differentials are also investigated.

Suggested Citation

  • Allan W. Gregory, 1987. "Testing Interest Rate Parity and Rational Expectations for Canada and the United States," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 289-305, May.
    • Handle: RePEc:cje:issued:v:20:y:1987:i:2:p:289-305
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    Citations

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    Cited by:

    1. G. Booth & Mustafa Chowdhory, 1992. "Canadian foreign exchange policies: Intervention, control, cointegration," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 128(1), pages 21-33, March.
    2. Christina Anderl & Guglielmo Maria Caporale, 2022. "Exchange rate parities and Taylor rule deviations," Empirical Economics, Springer, vol. 63(4), pages 1809-1835, October.
    3. Christina Anderl & Guglielmo Maria Caporale, 2021. "Testing for UIP: Nonlinearities, Monetary Announcements and Interest Rate Expectations," CESifo Working Paper Series 9027, CESifo.
    4. Jason Childs & Stuart Mestelman, 2006. "Rate‐of‐return Parity in Experimental Asset Markets," Review of International Economics, Wiley Blackwell, vol. 14(3), pages 331-347, August.
    5. Christina Anderl & Guglielmo Maria Caporale, 2022. "Testing for UIP-Type Relationships: Nonlinearities, Monetary Announcements and Interest Rate Expectations," Open Economies Review, Springer, vol. 33(4), pages 705-749, September.

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