'On some international parity conditions: An empirical investigation' by W. Gaab, M.J. Granziol and M. Horner

Michel Galy

European Economic Review, 1986, vol. 30, issue 3, 723-726

Abstract: Relying on sophisticated econometric procedures, the authors test the validity of three hypotheses (UIP, ERIR and EPPP) which are central to recent theories of exchange rate determination. These hypotheses are overwhelmingly rejected. I agree broadly with their conclusions. However, my interpretation of their results is that other reasons than inefficiency and/ or a time varying risk premium might also account for the rejection of these hypotheses, such as: a) the limited choice of statistical tests for serial correlation in the case of UIP; b) the existence of institutional factors related to substantial changes in reserve requirements on residents and non-resident deposits, changes which have distorted interest rate differentials; and c) discrepancies in the default risk premium on offshore markets depending on the currency denomination of offshore deposits.

Date: 1986
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