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PPP, random walks, and UIP after interest rate liberalisation in a small developing economy

Author

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  • Sanchez-Fung, Jose R.

    (NUBS University of Nottingham, Ningbo, China)

  • Prazmowski, Peter A.

    (Central Bank of the Dominican Republic)

Abstract

This paper investigates the impact of interest rate liberalisation on exchange rate expectations in the Dominican Republic (DR). The research employs a nested purchasing power parity, random walk, and uncovered interest parity specification that facilitates the recovery of the fundamentals behind the exchange rate expectations formation mechanism. The findings reveal that the most significant driver of exchange rate expectations is the interest rate differential between the DR and its main trading partner -the United States. These results are of relevance for the design and implementation of financial reforms and exchange rate policy alike, and in anticipating abrupt exchange rate movements.

Suggested Citation

  • Sanchez-Fung, Jose R. & Prazmowski, Peter A., 2003. "PPP, random walks, and UIP after interest rate liberalisation in a small developing economy," Economics Discussion Papers 2003-6, School of Economics, Kingston University London.
    • Handle: RePEc:ris:kngedp:2003_006
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    References listed on IDEAS

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    Cited by:

    1. Sanchez-Fung, Jose R., 2004. "Modelling money demand in the Dominican Republic," Economics Discussion Papers 2004-1, School of Economics, Kingston University London.
    2. Rashid, Abdul & Husain, Fazal, 2012. "On the modeling of exchange rate: some evidence from Pakistan," MPRA Paper 47547, University Library of Munich, Germany.

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    More about this item

    Keywords

    Interest rate liberalisation; exchange rate expectations; PPP/UIP; Dominican Republic.;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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