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

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  • Juan Carlos Cuestas
  • Karsten Staehr
  • Fabio Filipozzi

Abstract

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

Suggested Citation

  • Juan Carlos Cuestas & Karsten Staehr & Fabio Filipozzi, 2015. "Uncovered interest parity in Central and Eastern Europe : expectations and structural breaks," Bank of Estonia Working Papers wp2015-4, Bank of Estonia, revised 30 Dec 2015.
  • Handle: RePEc:eea:boewps:wp2015-4
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    Cited by:

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    2. Zorica Mladenović & Jelena Rašković, 2018. "Econometric Testing Of Uncovered Interest Rate Parity In Serbia," Economic Annals, Faculty of Economics, University of Belgrade, vol. 63(216), pages 35-62, January –.
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    5. Dąbrowski, Marek A. & Janus, Jakub, 2021. "Does the interest parity puzzle hold for Central and Eastern European economies?," MPRA Paper 107558, University Library of Munich, Germany.
    6. Mohti, Wahbeeah & Dionísio, Andreia & Vieira, Isabel & Ferreira, Paulo, 2019. "Regional and global integration of Asian stock markets," Research in International Business and Finance, Elsevier, vol. 50(C), pages 357-368.

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    More about this item

    Keywords

    uncovered interest parity; carry trade; expectations; structural breaks; Central and Eastern Europe;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F15 - International Economics - - Trade - - - Economic Integration

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