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Co-Movements in Long-Term Interest Rates and the Role of PPP-BasedExchange Rate Expectations

  • J.M. Berk
  • K.H.W. Knot

We investigate international co-movements in bond yields by testing for uncovered interest parity. We supplement existing work by focussing on long instead of short-term interest rates, and, related to that, by employing exchange rate expectations derived from purchasing power parity instead of actual outcomes. For the major floating currencies over the period 1975-97, we cannot support the notion of further increases in co-movement beyond that associated with the wave of financial market liberalization and deregulation in the early 1980s. Given the similarity between PPP-based UIP tests and those employing actual exchange rate outcomes, the value added of the former mainly lies with their ready availability.

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File URL: http://www.dnb.nl/binaries/sr037_tcm46-146815.pdf
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Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 37.

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Length: 32 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:dnb:staffs:37
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. Frank Browne & Warren Tease, 1992. "The Information Content of Interest Rate Spreads Across Financial Systems," OECD Economics Department Working Papers 109, OECD Publishing.
  2. Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993. "Further evidence on exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 78-98, February.
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  6. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  7. Kenneth A. Froot, 1990. "Short Rates and Expected Asset Returns," NBER Working Papers 3247, National Bureau of Economic Research, Inc.
  8. Popper, Helen, 1993. "Long-term covered interest parity: evidence from currency swaps," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 439-448, August.
  9. Charles Pigott, 1993. "International interest rate convergence: a survey of the issues and evidence," Quarterly Review, Federal Reserve Bank of New York, issue Win, pages 24-37.
  10. Bennett T. McCallum, 1992. "A Reconsideration of the Uncovered Interest Parity Relationship," NBER Working Papers 4113, National Bureau of Economic Research, Inc.
  11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  12. Paolo Mauro, 1995. "Current Account Surpluses and the Interest Rate Island in Switzerland," IMF Working Papers 95/24, International Monetary Fund.
  13. M.M.G. Fase & P.J.G. Vlaar, 1997. "International convergence of capital market interest rates," WO Research Memoranda (discontinued) 519, Netherlands Central Bank, Research Department.
  14. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
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  17. Knot, Klaas & de Haan, Jakob, 1995. "Interest rate differentials and exchange rate policies in Austria, The Netherlands, and Belgium," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 363-386, May.
  18. Howard Howe & Charles Pigott, 1991. "Determinants of long-term interest rates: an empirical study of several industrial countries," Quarterly Review, Federal Reserve Bank of New York, issue Win, pages 12-28.
  19. Helen Popper, 1990. "International capital mobility: direct evidence from long-term currency swaps," International Finance Discussion Papers 386, Board of Governors of the Federal Reserve System (U.S.).
  20. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
  21. Mark Holmes & Yangru Wu, 1997. "Capital controls and covered interest parity in the EU: Evidence from a panel-data unit root test," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 76-89, March.
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