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Co-Movements in Long-Term Interest Rates and the Role of PPP-BasedExchange Rate Expectations

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  • J.M. Berk
  • K.H.W. Knot

Abstract

We investigate international co-movements in bond yields by testing for uncovered interest parity. We supplement existing work by focussing on long instead of short-term interest rates, and, related to that, by employing exchange rate expectations derived from purchasing power parity instead of actual outcomes. For the major floating currencies over the period 1975-97, we cannot support the notion of further increases in co-movement beyond that associated with the wave of financial market liberalization and deregulation in the early 1980s. Given the similarity between PPP-based UIP tests and those employing actual exchange rate outcomes, the value added of the former mainly lies with their ready availability.

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File URL: http://www.dnb.nl/binaries/sr037_tcm46-146815.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 37.

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Length: 32 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:dnb:staffs:37

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Web page: http://www.dnb.nl/en/
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Keywords: interest parity relations; exchange rate expectations;

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References

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  1. Fell, J.P.C., 1996. "The Role of Short Rates and Foreign Long Rates in the Determination of Long-Term Interest Rates," Papers 4, European Monetary Institute.
  2. Fletcher, Donna J & Taylor, Larry W, 1996. ""Swap" Covered Interest Parity in Long-Date Capital Markets," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 530-38, August.
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  6. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  7. Mark Holmes & Yangru Wu, 1997. "Capital controls and covered interest parity in the EU: Evidence from a panel-data unit root test," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 76-89, March.
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  9. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
  10. Knot, Klaas & de Haan, Jakob, 1995. "Interest rate differentials and exchange rate policies in Austria, The Netherlands, and Belgium," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 363-386, May.
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  13. Popper, Helen, 1993. "Long-term covered interest parity: evidence from currency swaps," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 439-448, August.
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  16. Helen Popper, 1990. "International capital mobility: direct evidence from long-term currency swaps," International Finance Discussion Papers 386, Board of Governors of the Federal Reserve System (U.S.).
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  18. Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993. "Further evidence on exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 78-98, February.
  19. Adrian W. Throop, 1994. "International financial market integration and linkages of national interest rates," Economic Review, Federal Reserve Bank of San Francisco, pages 3-18.
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Cited by:
  1. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.

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