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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) in its series Working Papers with number 293.
Date of creation: Jan 2011
Date of revision:
Other versions of this item:
- Matros, Philipp & Weber, Enzo, 2010. "Non-Stationary Interest Rate Differentials and the Role of Monetary Policy," University of Regensburg Working Papers in Business, Economics and Management Information Systems 450, University of Regensburg, Department of Economics.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-05 (All new papers)
- NEP-CBA-2011-03-05 (Central Banking)
- NEP-MAC-2011-03-05 (Macroeconomics)
- NEP-MON-2011-03-05 (Monetary Economics)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekaterina Selezneva).
If references are entirely missing, you can add them using this form.