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Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe

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  • Ralf Brüggemann
  • Helmut Lütkepohl

Abstract

A system of U.S. and euro area short- and long-term interest rates is analyzed. According to the expectations hypothesis of the term structure the interest rate spreads should be stationary and according to the uncovered interest rate parity the difference between the U.S. and euro area longterm interest rates should also be stationary. If all four interest rates are integrated of order one, one would expect to find three linearly independent cointegration relations in the system of four interest rate series. Combining German and European Monetary Union data to obtain the euro area interest rate series we find indeed the theoretically expected three cointegration relations, in contrast to previous studies based on different data sets.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-035.

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Length: 16 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2005-035

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Keywords: Expectations hypothesis of the term structure; uncovered interest rate parity; unit roots; cointegration analysis;

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  1. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774501, October.
  2. Helmut Lütkepohl & Ralf Brüggemann, 2006. "A small monetary system for the euro area based on German data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(6), pages 683-702.
  3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 159-178.
  4. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  5. Katarina Juselius, 1998. "Changing monetary transmission mechanisms within the EU," Empirical Economics, Springer, Springer, vol. 23(3), pages 455-481.
  6. Kirchgassner, Gebhard & Wolters, Jurgen, 1993. "Does the DM Dominate the Euro Market? An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 773-78, November.
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Cited by:
  1. Koukouritakis, Minoas, 2013. "Expectations hypothesis in the context of debt crisis: Evidence from five major EU countries," Research in Economics, Elsevier, Elsevier, vol. 67(3), pages 243-258.
  2. Omer, Muhammad & de Haan, Jakob & Scholtens, Bert, 2013. "Does Uncovered Interest rate Parity Hold After All?," MPRA Paper 47572, University Library of Munich, Germany.
  3. Uwe Hassler & Verena Werkmann, 2014. "Multiple Comparisons and Joint Significance in Panel Unit Root Testing with Evidence on International Interest Rate Linkage," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 234(1), pages 23-43, January.
  4. Helmut Luetkepohl, 2009. "Forecasting Aggregated Time Series Variables: A Survey," Economics Working Papers, European University Institute ECO2009/17, European University Institute.
  5. Muhammad Omer & Jakob de Haan & Bert Scholtens, 2014. "Testing uncovered interest rate parity using LIBOR," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 46(30), pages 3708-3723, October.
  6. Enzo Weber, 2006. "British Interest Rate Convergence Between The Us And Europe: A Recursive Cointegration Analysis," The IUP Journal of Monetary Economics, IUP Publications, IUP Publications, vol. 0(4), pages 29-47, November.
  7. Simone Casellina & Mariacristina Uberti, 2008. "Optimal Monetary Policy and Long-term Interest Rate Dynamics: Taylor Rule Extensions," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 32(1), pages 183-198, September.
  8. Lanne, Markku & Lütkepohl, Helmut & Maciejowska, Katarzyna, 2010. "Structural vector autoregressions with Markov switching," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(2), pages 121-131, February.
  9. Heather Anderson & Mardi Dungey & Denise R. Osborn & Farshid Vahid, 2007. "Constructing Historical Euro Area Data," CAMA Working Papers 2007-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Jaya Krishnakumar & David Neto, 2009. "Testing Uncovered Interest Rate Parity and Term Structure using Three-Regime Threshold Unit Root VECM," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva, Institut d'Economie et Econométrie, Université de Genève 2009.06, Institut d'Economie et Econométrie, Université de Genève.
  11. Minoas Koukouritakis, 2010. "Structural breaks and the expectations hypothesis of the term structure: evidence from Central European countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 145(4), pages 757-774, January.
  12. Erdemlioglu, Deniz M, 2007. "A new Test of Uncovered Interest Rate Parity: Evidence from Turkey," MPRA Paper 10787, University Library of Munich, Germany.
  13. Lanne, Markku & Lütkepohl, Helmut, 2010. "Structural Vector Autoregressions With Nonnormal Residuals," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 28(1), pages 159-168.

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