Testing for long horizon UIP using PPP-based exchange rate expectations

This paper revisits the uncovered interest parity relation. It supplements existing work in two ways: It focuses on long instead of short-term interest rates, and, related to that, employs exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the maj...

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Bibliographic Details
Published in:Journal of banking & finance 2001-02, Vol.25 (2), p.377-391
Main Authors: Berk, Jan Marc, Knot, Klaas H.W.
Format: Article
Language:English
Subjects:
Banking
Capital market
Exchange rate expectations
Exchange rates
Foreign exchange rates
Interest
Interest parity relations
Interest rate parity theorem
Interest rates
International monetary relations
Purchasing power parity
Regression analysis
Statistical analysis
Studies
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Summary:This paper revisits the uncovered interest parity relation. It supplements existing work in two ways: It focuses on long instead of short-term interest rates, and, related to that, employs exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the major floating currencies over the period 1975–1997, the paper cannot support the notion of further increases in UIP-validation beyond that associated with the wave of financial market liberalization and deregulation in the early 1980s.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(00)00083-2