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International Parity Relationships between Germany and the United States: A Joint Modelling Approach

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  • Katarina Juselius

    (University of Copenhagen, Institute of Economics)

  • Ronald MacDonald

    (University of Strathclyde, Department of Economics)

Abstract

This paper examines the interrelations between the purchasing power parity, uncovered interest parity, the term structure of interest rates and the Fisher real interest rate parity using cointegration analysis. Dynamic adjustment and feed-back effects are estimated jointly in a full system of equations. An important finding is that the very slow, though significant, price adjustment towards sustainable levels of real exchange rates, has been compensated by corresponding changes in the spread of the long-term bond rates. Related to this is the strong empirical support for the weak exogeneity of the long-term bond rates, signifying the importance of the large US trade deficits (i.e. the low levels of US savings) and, hence, their linkage to international finance. Altogether, the results suggest that the transmission mechanisms over the post Bretton Woods period have been significantly different from standard theoretical assumptions.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 00-10.

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Length: 54 pages
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:kud:kuiedp:0010

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Keywords: International Parity Conditions;

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Cited by:
  1. Håvard Hungnes & Hilde C. Bj�rnland, 2006. "The importance of interest rates for forecasting the exchange rate," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(3), pages 209-221.
  2. Luca Fanelli & Emanuele Bacchiocchi, 2005. "Testing the purchasing power parity through I(2) cointegration techniques," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(6), pages 749-770.
  3. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2012. "Purchasing Power Parity between the UK and the Euro Area," Working Papers, University of Nevada, Las Vegas , Department of Economics 1208, University of Nevada, Las Vegas , Department of Economics.
  4. Mustafa Ismihan & Kivilcim Metin-Ozcan & Aysit Tansel, 2002. "Macroeconomic Instability, Capital Accumulation and Growth: The Case of Turkey 1963-1999," Working Papers, Economic Research Forum 0209, Economic Research Forum, revised Mar 2002.
  5. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers, Bank of England 248, Bank of England.
  6. MacDonald, Ronald & Marsh, Ian W, 1999. "Currency Spillovers and Tri-Polarity: A Simultaneous Model of the US Dollar, German Mark and Japanese Yen," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2210, C.E.P.R. Discussion Papers.
  7. Hilde Christiane Bjørnland & Håvard Hungnes, 2002. "Fundamental determinants of the long run real exchange rate: The case of Norway," Discussion Papers, Research Department of Statistics Norway 326, Research Department of Statistics Norway.
  8. Hilde C. Bjørnland & Håvard Hungnes, 2005. "The commodity currency puzzle," Discussion Papers, Research Department of Statistics Norway 423, Research Department of Statistics Norway.
  9. Macchiarelli, Corrado, 2011. "Bond market co-movements, expected inflation and the equilibrium real exchange rate," Working Paper Series, European Central Bank 1405, European Central Bank.
  10. Bruggeman, Annick & Donnay, Marie, 2003. "A monthly monetary model with banking intermediation for the euro area," Working Paper Series, European Central Bank 0264, European Central Bank.
  11. Keblowski, Piotr & Welfe, Aleksander, 2010. "Estimation of the equilibrium exchange rate: The CHEER approach," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(7), pages 1385-1397, November.
  12. Maria Herrerias, 2010. "The causal relationship between equipment investment and infrastructures on economic growth in China," Frontiers of Economics in China, Springer, Springer, vol. 5(4), pages 509-526, December.
  13. McCauley, Joseph L., 2009. "ARCH and GARCH models vs. martingale volatility of finance market returns," International Review of Financial Analysis, Elsevier, Elsevier, vol. 18(4), pages 151-153, September.

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