International Parity Relationships between Germany and the United States: A Joint Modelling Approach

Katarina Juselius and Ronald MacDonald ()

No 00-10, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper examines the interrelations between the purchasing power parity, uncovered interest parity, the term structure of interest rates and the Fisher real interest rate parity using cointegration analysis. Dynamic adjustment and feed-back effects are estimated jointly in a full system of equations. An important finding is that the very slow, though significant, price adjustment towards sustainable levels of real exchange rates, has been compensated by corresponding changes in the spread of the long-term bond rates. Related to this is the strong empirical support for the weak exogeneity of the long-term bond rates, signifying the importance of the large US trade deficits (i.e. the low levels of US savings) and, hence, their linkage to international finance. Altogether, the results suggest that the transmission mechanisms over the post Bretton Woods period have been significantly different from standard theoretical assumptions.

Keywords: International; Parity; Conditions (search for similar items in EconPapers)
JEL-codes: E31 E43 F31 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec and nep-ifn
Date: 2000-09
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Working Paper: International Parity Relationships Between Germany and the United States: A Joint Modelling Approach (2003)
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