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Leaning Against the Parity

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  • Alex Luiz Ferreira

Abstract

The paper presents evidence that the simultaneous relationship between uncovered interest rate parity (UIP) and a monetary policy function can explain the empirical failure of the former. Using the model proposed by McCallum (1994), we carry out tests for a sample of developed and emerging markets from 1995M5 to 2004M3. The results lend strong support to the view that monetary policy affects the equilibrium nominal interest rate differential between emerging economies and the US. Slow adjustment in interest rates and reaction against price changes seem to be the prominent features of the reaction function. Shocks have an asymmetric impact on the volatility of the differentials which is also significant to explain monetary policy. Finally, the dynamic properties of uncovered interest rate parity ex post deviations, also interpreted as risk premium, influence the equilibrium nominal interest rate differentials.

Suggested Citation

  • Alex Luiz Ferreira, 2004. "Leaning Against the Parity," Studies in Economics 0413, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:0413
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    2. Li, Dandan & Ghoshray, Atanu & Morley, Bruce, 2013. "An empirical study of nonlinear adjustment in the UIP model using a smooth transition regression model," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 109-120.
    3. Zorica Mladenović & Jelena Rašković, 2018. "Econometric Testing Of Uncovered Interest Rate Parity In Serbia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 63(216), pages 35-62, January –.
    4. C. Emre Alper & Oya Pinar Ardic & Salih Fendoglu, 2009. "The Economics Of The Uncovered Interest Parity Condition For Emerging Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 115-138, February.
    5. zcan Karahan & Olcay olak, 2012. "Does Uncovered Interest Rate Parity Hold in Turkey?," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 386-394.

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    More about this item

    Keywords

    Uncovered interest rate parity; monetary policy; reaction function; interest rates;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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