Does the nominal exchange rate regime affect the real interest parity condition?

Arbeitspapier

The real interest parity (RIP) condition combines two cornerstones in international finance, uncovered interest parity (UIP) and ex ante purchasing power parity (PPP). The extent of deviation from RIP is therefore an indicator of the lack of product and financial market integration. This paper investigates whether the nominal exchange rate regime has an impact on RIP. The analysis is based on 15 annual real interest rates and covers a long time span, 1870-2006. Four subperiods are distinguished and linked to fixed and flexible exchange rate regimes: the Gold Standard, the interwar float, the Bretton Woods system and the current managed float. Panel integration techniques are applied to increase the power of the tests, where cross section correlation is embedded via common factor structures. The results suggest that RIP holds as a long run condition irrespectively of the nominal exchange rate regime. However, adjustment towards RIP is affected by both the institutional framework and the historical episode. Half lives of shocks tend to be lower under fixed exchange rates and in the first part of the sample. Although barriers to trade and capital controls have been removed, they did not lead to lower half lives during the managed float.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: FIW Working Paper ; No. 64

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; International Investment; Long-term Capital Movements ; Foreign Exchange ; Open Economy Macroeconomics
• Thema: Real interest parity ; nominal exchange rate regime ; panel unit roots ; common factors

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Dreger, Christian
• Ereignis: Veröffentlichung
• (wer): FIW - Research Centre International Economics
• (wo): Vienna
• (wann): 2010

Weitere Informationen

• Handle: http://hdl.handle.net/10419/121063
• Letzte Aktualisierung: 20.09.2024, 08:21 MESZ