Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe

Ralf Brueggemann and Helmut Luetkepohl
Authors registered in the RePEc Author Service: Helmut Lütkepohl () and Ralf Brüggemann ()

No ECO2005/08, Economics Working Papers from European University Institute

Abstract: A system of U.S. and euro area short- and long-term interest rates is analyzed. According to the expectations hypothesis of the term structure the interest rate spreads should be stationary and according to the uncovered interest rate parity the difference between the U.S. and euro area longterm interest rates should also be stationary. If all four interest rates are integrated of order one, one would expect to find three linearly independent cointegration relations in the system of four interest rate series. Combining German and European Monetary Union data to obtain the euro area interest rate series we find indeed the theoretically expected three cointegration relations, in contrast to previous studies based on different data sets.

Keywords: Unit Roots; Multiple Frequency I(1) Process; Nonrational Transfer Function; Cointegration; VARMA Process; Information Criteria (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fmk and nep-mon
Date: 2005
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Working Paper: Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:eui:euiwps:eco2005/08

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