The Triple-Parity Law

Jean-Christian Lambelet and Alexander Mihailov ()
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Jean-Christian Lambelet: University of Lausanne

No 33, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: Scientists and epistemologists agree that a scientific law must be relatively simple and not contradicted by the available evidence. We propose and test one such law pertaining to international economics, the triple-parity law. It integrates three well-known equilibrium conditions, which are shown to prevail in the long run, on average and ex post: uncovered nominal interest rate parity (UIP); relative purchasing power parity (PPP); real interest rate parity (RIP). Using a cross-section of trend growth rates of relevant variables for 18 OECD countries in the post-Bretton-Woods/pre-EMU floating rate period (1976-1998) and employing a variety of single-equation and system estimation methods, we present robust evidence that the triple-parity law ultimately holds for large and diversified economies. For a few, mostly small and specialized countries, its working is however affected by some significant financial or real comparative (dis)advantages, for which estimates are provided. The law says nothing about short-term dynamics, yet measures of the speed of convergence to long-run equilibrium are computed. The triple-parity law, finally, illustrates another, rather fundamental point: if we look beyond short-term fluctuations and vagaries, economic laws do exist in the long run, just as economists used to think in the days of Marshall, Fisher, Walras and Pareto

Keywords: nominal uncovered interest rate parity; relative purchasing power parity; real interest rate parity; international arbitrage; economic laws; OECD countries (search for similar items in EconPapers)
JEL-codes: C21 C31 E44 E41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn and nep-mac
Date: 2006-07-04
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Related works:
Working Paper: The Triple-Parity Law (2005)
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