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Uncovered interest rate parity and analysis of monetary convergence of potential EMU accession countries

  • Oliver Holtemöller

    ()

This paper analyzes deviations from uncovered interest rate parity which are interpreted as indicator of the substitutability of currencies. Backward recursive statistical tests and error correction models are applied to study the co-movement of interest rates, and rolling regressions are used to illustrate size and volatility of country specific risk premia. In accordance to their degree of monetary integration with the Euro area, EU acceding and accession countries are divided into three groups. Additionally, the results show that uncovered interest rate parity is well supported by empirical evidence if it is augmented by a country-specific risk premium.

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File URL: http://hdl.handle.net/10.1007/s10368-005-0026-0
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Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 2 (2005)
Issue (Month): 1 (06)
Pages: 33-63

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Handle: RePEc:kap:iecepo:v:2:y:2005:i:1:p:33-63
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=111059

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  1. Daniel Piazolo, 2000. "Eastern Europe between Transition and Accession: An Analysis of Reform Requirements," Kiel Working Papers 991, Kiel Institute for the World Economy.
  2. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  3. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
  4. Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia Pascual, 2002. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," NBER Working Papers 9393, National Bureau of Economic Research, Inc.
  5. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  7. repec:sae:niesru:v:145:y::i:1:p:43-63 is not listed on IDEAS
  8. Bruno Merlevede & Joseph Plasmans & Bas van Aarle, 2003. "A Small Macroeconomic Model of the EU-Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 221-250, July.
  9. Levich, Richard M, 1989. "Is the Foreign Exchange Market Efficient?," Oxford Review of Economic Policy, Oxford University Press, vol. 5(3), pages 40-60, Autumn.
  10. Lucjan Orlowski, 2003. "Monetary Convergence and Risk Premiums in the EU Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 251-267, July.
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