Depreciation expectations and interest rate differentials: Are there regime switches? The Peruvian case

Alberto Humala

No 2006-002, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper presents an econometric assessment of the uncovered interest parity (UIP) for Peruvian financial instruments and documents the main empirical regularities in this relationship. The information contents of interest rate differentials about depreciation expectations are assessed under different econometric specifications. In the case of Peru, linear approximations along with periods of relatively high expected inflation suggest that UIP would hold on average over the short term (contrary to international evidence). Alternatively, with price-stability periods (as in a fully-fledged inflation targeting scheme), linear representations show opposite evidence to UIP. When both scenarios are included over a given sample size, regime switching models distinguish between periods consistent with UIP and those periods in which UIP is not so relevant. In particular, Markov switching models signal the importance of foreign exchange volatility to assess UIP validity.

Keywords: paridad descubierta de tasas de interés; diferenciales de tasas de interés; tipo de cambio; modelos de regímenes cambiantes Markov (search for similar items in EconPapers)
JEL-codes: F21 F31 F41 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-cba and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2006-002

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