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The Triple-Parity Law

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  • Jean-Christian Lambelet

    (University of Lausanne)

  • Alexander Mihailov

    (University of Essex)

Abstract

Scientists and epistemologists agree that a scientific law must be relatively simple and not contradicted by the available evidence. We propose and test one such law pertaining to international economics, the triple-parity law. It integrates three well-known equilibrium conditions, which are shown to prevail in the long run, on average and ex post: uncovered nominal interest rate parity (UIP); relative purchasing power parity (PPP); real interest rate parity (RIP). Using a cross-section of trend growth rates of relevant variables for 18 OECD countries in the post-Bretton-Woods/pre-EMU floating rate period (1976-1998) and employing a variety of single-equation and system estimation methods, we present robust evidence that the triple-parity law ultimately holds for large and diversified economies. For a few, mostly small and specialized countries, its working is however affected by some significant financial or real comparative (dis)advantages, for which estimates are provided. The law says nothing about short-term dynamics, yet measures of the speed of convergence to long-run equilibrium are computed. The triple-parity law, finally, illustrates another, rather fundamental point: if we look beyond short-term fluctuations and vagaries, economic laws do exist in the long run, just as economists used to think in the days of Marshall, Fisher, Walras and Pareto

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 33.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:33

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Keywords: nominal uncovered interest rate parity; relative purchasing power parity; real interest rate parity; international arbitrage; economic laws; OECD countries;

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Cited by:
  1. Jean-Christian Lambelet & Alexander Mihailov, 2006. "The Triple-Parity Law," Computing in Economics and Finance 2006 33, Society for Computational Economics.
  2. Huizinga, Harry & Schaling, Eric & van der Windt, Peter C, 2007. "Capital Controls and Foreign Investor Subsidies Implicit in South Africa's Dual Exchange Rate System," CEPR Discussion Papers 6347, C.E.P.R. Discussion Papers.
  3. Stazka, Agnieszka, 2008. "International parity relations between Poland and Germany: a cointegrated VAR approach," MPRA Paper 24057, University Library of Munich, Germany.

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