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Uncovered Interest Rate Parity and Analysis of Monetary Convergence of Potential EMU Accession Countries

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  • Holtemöller, Oliver

Abstract

This paper analyzes deviations from uncovered interest rate parity which are interpreted as indicator of the substitutability of currencies. Backward recursive statistical tests and error correction models are applied to study the co-movement of interest rates, and rolling regressions are used to illustrate size and volatility of country specific risk premia. In accordance to their degree of monetary integration with the Euro area, EU acceding and accession countries are divided into three groups. Additionally, the results show that uncovered interest rate parity is well supported by empirical evidence if it is augmented by a country-specific risk premium.

Suggested Citation

  • Holtemöller, Oliver, 2003. "Uncovered Interest Rate Parity and Analysis of Monetary Convergence of Potential EMU Accession Countries," SFB 373 Discussion Papers 2003,40, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  • Handle: RePEc:zbw:sfb373:200340
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    References listed on IDEAS

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    1. Lucjan Orlowski, 2003. "Monetary Convergence and Risk Premiums in the EU Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 251-267, July.
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    10. Paul De Grauwe, 2003. "The Euro at Stake? The Monetary Union in an Enlarged Europe," CESifo Economic Studies, CESifo, vol. 49(1), pages 103-121.
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    Citations

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    Cited by:

    1. Philipp Matros & Enzo Weber, 2014. "Non-stationary Interest Rate Differentials and the Role of Monetary Policy," International Economic Journal, Taylor & Francis Journals, vol. 28(3), pages 497-512, September.
    2. Volosovych, Vadym, 2011. "Measuring financial market integration over the long run: Is there a U-shape?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1535-1561.
    3. Kasman, Adnan & Kirbas-Kasman, Saadet & Turgutlu, Evrim, 2008. "Monetary policy convergence of potential EMU accession countries: A cointegration analysis with shifting regimes," Economic Modelling, Elsevier, vol. 25(2), pages 340-350, March.
    4. Mevlud Islami, 2008. "Interdependence Between Foreign Exchange Markets and Stock Markets in Selected European Countries," Schumpeter Discussion Papers sdp08007, Universitätsbibliothek Wuppertal, University Library.
    5. Hubert Gabrisch & Lucjan T. Orlowski, 2010. "Interest Rate Convergence in Euro-Candidate Countries: Volatility Dynamics of Sovereign Bond Yields," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(6), pages 69-85, November.
    6. Lucjan T. Orlowski & Kirsten Lommatzsch, 2005. "Bond Yield Compression in the Countries Converging to the Euro," William Davidson Institute Working Papers Series wp799, William Davidson Institute at the University of Michigan.
    7. Lucjan T. Orlowski, 2005. "Monetary Policy Adjustments on the Final Passage towards the Euro," CASE Network Studies and Analyses 0294, CASE-Center for Social and Economic Research.
    8. Juan Carlos Cuestas & Fabio Filipozzi & Karsten Staehr, 2015. "Uncovered Interest Parity in Central and Eastern Europe: Sample, Expectations and Structural Breaks," Working Papers 2015014, The University of Sheffield, Department of Economics.
    9. Carlos Eduardo Castillo-Maldonado & Fidel Pérez-Macal, 2013. "Assessment of models to forecast exchange rates: The quetzal–U.S. dollar exchange rate," Journal of Applied Economics, Universidad del CEMA, vol. 16, pages 71-99, May.
    10. Yu Hsing, 2007. "Analysis of exchange rate fluctuations in Estonia: test of the interest parity condition and the open economy model," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 51-54, January.
    11. Mevlud Islami, 2008. "Interdependence Between Foreign Exchange Markets and Stock Markets in Selected European Countries," EIIW Discussion paper disbei160, Universitätsbibliothek Wuppertal, University Library.
    12. Eirini Syngelaki, 2010. "Linkages between Excess Currency and Stock Market Returns:Granger Causality in Mean and Variance," Economics Department Working Paper Series n209-10.pdf, Department of Economics, National University of Ireland - Maynooth.

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    More about this item

    Keywords

    Cointegration; economic convergence; European monetary union; monetary integration; interest rate parity;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • 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
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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