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Uncovered interest rate parity and analysis of monetary convergence of potential EMU accession countries

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  • Oliver Holtemöller

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Abstract

This paper analyzes deviations from uncovered interest rate parity which are interpreted as indicator of the substitutability of currencies. Backward recursive statistical tests and error correction models are applied to study the co-movement of interest rates, and rolling regressions are used to illustrate size and volatility of country specific risk premia. In accordance to their degree of monetary integration with the Euro area, EU acceding and accession countries are divided into three groups. Additionally, the results show that uncovered interest rate parity is well supported by empirical evidence if it is augmented by a country-specific risk premium. --

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File URL: http://hdl.handle.net/10.1007/s10368-005-0026-0
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Bibliographic Info

Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 2 (2005)
Issue (Month): 1 (06)
Pages: 33-63

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Handle: RePEc:kap:iecepo:v:2:y:2005:i:1:p:33-63

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Web page: http://www.springerlink.com/link.asp?id=111059

Related research

Keywords: Cointegration; economic convergence; European monetary union; monetary integration; interest rate parity; risk premium; C22; C32; F36; F41;

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  1. Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia Pascual, 2002. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," NBER Working Papers 9393, National Bureau of Economic Research, Inc.
  2. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  3. Lucjan Orlowski, 2003. "Monetary Convergence and Risk Premiums in the EU Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 251-267, July.
  4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  5. Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
  6. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  7. Levich, Richard M, 1989. "Is the Foreign Exchange Market Efficient?," Oxford Review of Economic Policy, Oxford University Press, vol. 5(3), pages 40-60, Autumn.
  8. Daniel Piazolo, 2000. "Eastern Europe between Transition and Accession: An Analysis of Reform Requirements," Kiel Working Papers 991, Kiel Institute for the World Economy.
  9. Bruno Merlevede & Joseph Plasmans & Bas van Aarle, 2003. "A Small Macroeconomic Model of the EU-Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 221-250, July.
  10. R. Barrell & R. Anderton & G.M. Caporale & J.W. in't Veld, 1993. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 145(1), pages 43-63, August.
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Cited by:
  1. Lucjan T. Orlowski & Kirsten Lommatzsch, 2005. "Bond Yield Compression in the Countries Converging to the Euro," William Davidson Institute Working Papers Series wp799, William Davidson Institute at the University of Michigan.

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