Political vs. currency premia in international real interest differentials : A study of forward rates for 24 countries
Different approaches to quantifying the degree of capital mobility for a cross-section of currencies -- particularly saving-investment correlations and tests of real interest parity - have appeared to show a surprisingly low degree of financial market integration. We use a new data set, forward rate data for 24 countries, including many small industrialized countries and seven LDCs, to decompose the real interest differential into two parts: the covered interest differential, or political premium, and the real forward discount, or currency premium. The latter in turn can be decomposed into the exchange risk premium and expected real depreciation. We find a high degree of capital mobility across political boundaries for most of the 011 countries, plus Hong Kong and Singapore, for our sample period of 1982 to 1987. Even for most of the other LDCs and smaller industrialized countries, for which covered interest parity clearly fails, the political premium is not as big a component of the real interest differential as the currency premium. France would appear to have higher capital mobility than most by the criterion of real interest differentials, but is seen in fact to have low capital mobility by the criterion of covered interest differentials, a clear example of the superiority of the latter criterion.
(This abstract was borrowed from another version of this item.)
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
- Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December.
- Gerard Caprio & David H. Howard, 1983. "Domestic saving, current accounts, and international capital mobility," International Finance Discussion Papers 244, Board of Governors of the Federal Reserve System (U.S.).
- Michaek Darby, 1985.
"The Internationalization of American Banking and Finance: Structure, Risk, and World Interest Rates,"
UCLA Economics Working Papers
385, UCLA Department of Economics.
- Darby, Michael R., 1986. "The internationalization of American banking and finance: Structure, risk, and world interest rates," Journal of International Money and Finance, Elsevier, vol. 5(4), pages 403-428, December.
- Michael R. Darby, 1986. "The Internationalization of American Banking and Finance: Structure, Risk, adn World Interest Rates," NBER Working Papers 1989, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:32:y:1988:i:5:p:1083-1114. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.