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The validity of uncovered interest parity: Evidence from african members and non-member of the organisation of petroleum exporting countries (OPEC)

Adeolu O. Adewuyi and Joseph O. Ogebe

Economic Modelling, 2019, vol. 82, issue C, 229-249

Abstract: This paper re-examines uncovered interest parity (UIP) puzzle using Africa where there is dearth of studies. It extends the previous literature in the following ways. It captures the heterogeneity (oil and non-oil sources of shocks) in the region by considering both African members of the Organisation of Petroleum Exporting Countries- OPEC (Algeria, Nigeria and Angola) and non-member (South Africa) to ensure generalisation of findings. It also explores asymmetric exchange rate responses to diverse monetary policy stances from a new dimension by explicitly measuring asymmetries and capturing long- and short-run dynamics using the new non-linear autoregressive distributed lag (NARDL) and asymmetric component AC-GARCH models along with other recent methods for results' robustness. Results from alternative methods show that UIP fails to hold in the African members and non-member of OPEC which is attributable to capital mobility restrictions and currency risk. However, asymmetric and permanent/transitory exchange rate response to monetary policy stances was noticed with little evidence of risk premium dynamics and role of price level instability in UIP validity.

Keywords: Uncovered interest parity; Non-linear approaches; Extreme sampling method; African OPEC and non-OPEC members; A-C-GARCH (search for similar items in EconPapers)
JEL-codes: C22 E43 F31 G12 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.econmod.2019.01.008

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