Does the Interest Parity Puzzle Hold for Central and Eastern European Economies?

Marek Dąbrowski and Jakub Janus ()
Additional contact information
Jakub Janus: Krakow University of Economics

Open Economies Review, 2024, vol. 35, issue 3, No 1, 456 pages

Abstract: Abstract This paper examines the uncovered interest parity puzzle in Central and Eastern European countries. Apart from investigating baseline UIP regressions, we check for structural breaks in this relationship, scrutinize deviations from the UIP, and employ different estimation methods and models augmented with various risk measures. Moreover, we offer several extensions to the common UIP testing that account for foreign-exchange interventions, the implied volatility of exchange rates, and the limited availability of data on direct measures of market expectations. The study shows that the choice of the reference currency matters for the outcome of the interest parity tests in the CEE economies. In particular, we demonstrate that inconsistencies between the results of the UIP tests vis-à-vis the euro and the US dollar that appear in CEE economies may be accounted for by the movements of the euro-dollar risk premium. This regularity has not been documented in previous studies. Additionally, we show that (a) the FX interventions in Czechia distorted the UIP, (b) the directly measured exchange rate expectations (granular survey data) in Poland do not seem to be informed by the UIP relationship, (c) the limited resilience of CEE economies to rare disasters may plausibly explain deviations from the UIP.

Keywords: Interest parity puzzle; Forward premium puzzle; Risk premium; Fama regression; Central and Eastern Europe (search for similar items in EconPapers)
JEL-codes: F31 F41 G15 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11079-023-09738-1 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Does the interest parity puzzle hold for Central and Eastern European economies? (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:openec:v:35:y:2024:i:3:d:10.1007_s11079-023-09738-1

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11079/PS2

DOI: 10.1007/s11079-023-09738-1

Access Statistics for this article

Open Economies Review is currently edited by G.S. Tavlas

More articles in Open Economies Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().