Non-Stationary Interest Rate Differentials and the Role of Monetary Policy
AbstractThe present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe, where we can validate the theoretical considerations by multivariate time series techniques.
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Bibliographic InfoPaper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 450.
Date of creation: 21 Dec 2010
Date of revision:
Uncovered Interest Rate Parity; Monetary Policy Rules; Cointegration; Vector-Error Correction Model;
Other versions of this item:
- Philipp Matros & Enzo Weber, 2011. "Non-Stationary Interest Rate Differentials and the Role of Monetary Policy," Working Papers 293, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-CBA-2011-01-03 (Central Banking)
- NEP-IFN-2011-01-03 (International Finance)
- NEP-MAC-2011-01-03 (Macroeconomics)
- NEP-MON-2011-01-03 (Monetary Economics)
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