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Covered Interest Parity And Frictions In Currency And Money Markets: Analysis Of British Pound And Dollar For The Period 1999-2006

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  • Christopher E.S. WARBURTON

Abstract

This paper investigates the stabilizing effects of monetary policy on currency markets when macroeconomic conditions are relatively stable during the Great Moderation. Quarterly time series data from 1999 to 2006 suggest that monetary policy seems to play a dominant role in the stability of currency markets. Though arbitrage and monetary policy jointly and almost exhaustively explain a large proportion of the variation in forward exchange rates, the findings of the paper generally support the theory that arbitrage activities may not necessarily be robust preconditions for instability in currency markets during periods of moderation; especially when the performance of a specific class of convertible currencies is taken into consideration for a given period of time. The paper concludes that the currency and money markets are highly cointegrated and that monetary policy plays a dominant role in minimizing intertemporal frictions in the currency markets.

Suggested Citation

  • Christopher E.S. WARBURTON, 2018. "Covered Interest Parity And Frictions In Currency And Money Markets: Analysis Of British Pound And Dollar For The Period 1999-2006," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 18(1), pages 55-72.
    • Handle: RePEc:eaa:aeinde:v:18:y:2018:i:1_4
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    File URL: http://www.usc.es/~economet/reviews/aeid1814.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jackson, Emerson Abraham, 2020. "Understanding SLL / US$ exchange rate dynamics in Sierra Leone using Box-Jenkins ARIMA approach," MPRA Paper 97965, University Library of Munich, Germany, revised 03 Jan 2020.

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    More about this item

    Keywords

    Arbitrage; Cointegration; Exchange Rates; Forward Premium; Covered Interest Parity; Money Market.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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