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Uncovered interest parity in Central and Eastern Europe : expectations and structural breaks

Listed author(s):
  • Juan Carlos Cuestas
  • Karsten Staehr

    ()

  • Fabio Filipozzi

This paper examines the empirical validity of the hypothesis of uncovered interest parity (UIP) using data from five Central and Eastern European countries with floating exchange rates for the period 2003–2014. The analysis includes forward-looking as well as static expectations and also allows for different types of structural breaks. The variable representing the deviation from UIP is stationary when expectations are forward-looking, ruling out persistent divergences from UIP. The deviation from UIP is however typically not stationary when expectations are static, even when structural breaks are incorporated, and this leads to the rejection of the UIP hypothesis in this case. The results underscore the importance of the expectations assumptions when the UIP hypothesis is tested

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Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number wp2015-4.

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Date of creation: 30 Dec 2015
Date of revision: 30 Dec 2015
Handle: RePEc:eea:boewps:wp2015-4
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