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

  • Holtemöller, Oliver

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.

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Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2003,40.

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Date of creation: 2003
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Handle: RePEc:zbw:sfb373:200340
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  1. Cheung, Yin-Wong & Chinn, Menzie David & Garcia Pascual, Antonio, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series qt12z9x4c5, Department of Economics, UC Santa Cruz.
  2. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
  3. Levich, Richard M, 1989. "Is the Foreign Exchange Market Efficient?," Oxford Review of Economic Policy, Oxford University Press, vol. 5(3), pages 40-60, Autumn.
  4. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  6. Daniel Piazolo, 2000. "Eastern Europe between Transition and Accession: An Analysis of Reform Requirements," Kiel Working Papers 991, Kiel Institute for the World Economy.
  7. Bruno Merlevede & Joseph Plasmans & Bas van Aarle, 2003. "A Small Macroeconomic Model of the EU-Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 221-250, July.
  8. repec:sae:niesru:v:145:y::i:1:p:43-63 is not listed on IDEAS
  9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  10. 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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