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The Triple-Parity Law

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  • Jean-Christian Lambelet

    (University of Lausanne)

  • Alexander Mihailov

    (University of Essex)

Abstract

Scientists and epistemologists agree that a scientific law must be relatively simple and not contradicted by the available evidence. We propose and test one such law pertaining to international economics, the triple-parity law. It integrates three well-known equilibrium conditions, which are shown to prevail in the long run, on average and ex post: uncovered nominal interest rate parity (UIP); relative purchasing power parity (PPP); real interest rate parity (RIP). Using a cross-section of trend growth rates of relevant variables for 18 OECD countries in the post-Bretton-Woods/pre-EMU floating rate period (1976-1998) and employing a variety of single-equation and system estimation methods, we present robust evidence that the triple-parity law ultimately holds for large and diversified economies. For a few, mostly small and specialized countries, its working is however affected by some significant financial or real comparative (dis)advantages, for which estimates are provided. The law says nothing about short-term dynamics, yet measures of the speed of convergence to long-run equilibrium are computed. The triple-parity law, finally, illustrates another, rather fundamental point: if we look beyond short-term fluctuations and vagaries, economic laws do exist in the long run, just as economists used to think in the days of Marshall, Fisher, Walras and Pareto

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  • Jean-Christian Lambelet & Alexander Mihailov, 2006. "The Triple-Parity Law," Computing in Economics and Finance 2006 33, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:33
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    Cited by:

    1. Huizinga, Harry & Schaling, Eric & van der Windt, Peter C, 2007. "Capital Controls and Foreign Investor Subsidies Implicit in South Africa's Dual Exchange Rate System," CEPR Discussion Papers 6347, C.E.P.R. Discussion Papers.
    2. Lambelet, Jean-Christian & Mihailov, Alexander, 2005. "The Triple-Parity Law," Economics Discussion Papers 8896, University of Essex, Department of Economics.
    3. Stazka, Agnieszka, 2008. "International parity relations between Poland and Germany: a cointegrated VAR approach," MPRA Paper 24057, University Library of Munich, Germany.

    More about this item

    Keywords

    nominal uncovered interest rate parity; relative purchasing power parity; real interest rate parity; international arbitrage; economic laws; OECD countries;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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