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Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe

  • Ralf Brüggemann
  • Helmut Lütkepohl

A system of U.S. and euro area short- and long-term interest rates is analyzed. According to the expectations hypothesis of the term structure the interest rate spreads should be stationary and according to the uncovered interest rate parity the difference between the U.S. and euro area longterm interest rates should also be stationary. If all four interest rates are integrated of order one, one would expect to find three linearly independent cointegration relations in the system of four interest rate series. Combining German and European Monetary Union data to obtain the euro area interest rate series we find indeed the theoretically expected three cointegration relations, in contrast to previous studies based on different data sets.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-035.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-035.

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Length: 16 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2005-035
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  1. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  2. Katarina Juselius, 1998. "Changing monetary transmission mechanisms within the EU," Empirical Economics, Springer, vol. 23(3), pages 455-481.
  3. Ralf Brueggemann & Helmut Luetkepohl, 2004. "A Small Monetary System for the Euro Area Based on German Data," Economics Working Papers ECO2004/24, European University Institute.
  4. Kirchgassner, Gebhard & Wolters, Jurgen, 1993. "Does the DM Dominate the Euro Market? An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 773-78, November.
  5. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
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