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

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Author Info
Katarina Juselius (University of Copenhagen, Institute of Economics)
Ronald MacDonald (University of Strathclyde, Department of Economics)

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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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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
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Handle: RePEc:kud:kuiedp:0010

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Keywords: International Parity Conditions;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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  1. Alessandro Girardi & Paolo Paesani, 2005. "Net Foreign Assets In The Euro Area: A Cointegration Analysis," Working Papers 76, Sapienza University of Rome, Department of Public Economics. [Downloadable!]
  2. Niels Framroze Møller, 2006. "Linking Simple Economic Theory Models and the Cointegrated Vector AutoRegressive Model: Some Illustrative Examples," Discussion Papers 06-15, University of Copenhagen. Department of Economics. [Downloadable!]
  3. Luca Fanelli & Emanuele Bacchiocchi, 2005. "Testing the purchasing power parity through I(2) cointegration techniques," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(6), pages 749-770. [Downloadable!]
  4. Hilde C. Bjørnland and Håvard Hungnes, 2005. "The commodity currency puzzle," Discussion Papers 423, Research Department of Statistics Norway. [Downloadable!]
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  5. Mustafa Ismihan & Kivilcim Metin-Özcan & Aysit Tansel, 2002. "Macroeconomic instability, capital accumulation and growth: The case of Turkey 1963-1999," ERC Working Papers 0204, ERC - Economic Research Center, Middle East Technical University, revised Apr 2002. [Downloadable!]
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  6. Hilde Christiane Bjørnland and Håvard Hungnes, 2002. "Fundamental determinants of the long run real exchange rate: The case of Norway," Discussion Papers 326, Research Department of Statistics Norway. [Downloadable!]
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  7. Annick Bruggeman & Marie Donnay, 2003. "A monthly monetary model with banking intermediation for the euro area," Working Paper Series 264, European Central Bank. [Downloadable!]
  8. Hilde C. Bjørnland and Håvard Hungnes, 2003. "The importance of interest rates for forecasting the exchange rate," Discussion Papers 340, Research Department of Statistics Norway. [Downloadable!]
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