PRICE‐BASED MEASUREMENT OF FINANCIAL GLOBALIZATION: A CROSS‐COUNTRY STUDY OF INTEREST RATE PARITY

Hiro Ito and Menzie Chinn

Pacific Economic Review, 2007, vol. 12, issue 4, 419-444

Abstract: Abstract. We characterize the relationship between ex post exchange rate depreciation and the interest differential for both developed and emerging market economies. The measured ex post uncovered interest differentials in terms of both levels and absolute values are then related to a set of variables that capture macroeconomic and policy conditions. We find that a wide diversity in the coefficient relating depreciations and interest differentials can be attributed to differences in inflation volatility, financial development, capital account openness, legal development and the nature of the exchange rate regimes. The robust results are mainly found in the emerging market country grouping.

Date: 2007
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