TESTING FOR PURCHASING POWER PARITY AND INTEREST RATE PARITIES ON NORWEGIAN DATA

Anne Sofie Jore, Terje Skjerpen and Anders Rygh Swensen
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Anne Sofie Jore: Central Bureau of Statistics, Norway
Anders Rygh Swensen: Central Bureau of Statistics, Norway

Chapter 4 in Link Proceedings 1991, 1992:Selected Papers from Meetings in Moscow, 1991, and Ankara, 1992, 1998, pp 60-84 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn this paper we investigate the cointegrated relationships within a VAR-model containing the Norwegian inflation rate, the foreign inflation rate, the depreciation rate, the Norwegian short-run interest rate and the foreign short-run interest rate (quarterly data). Since we were unable to obtain a well-behaved equation for the change in depreciation, we have chosen to treat the change in depreciation as a weakly exogenous variable (with respect to the long-run parameters). This is implemented by conditioning on depreciation. Under this assumption, the residuals in the remaining equations are reasonably well-behaved. From an economic point of view our main aim is to test whether the Uncovered Interest rate Parity (UIP), the Purchasing Power Parity (PPP), and the Real Interest Rate Parity (RIRP) are contained in the cointegrating space. In the maintained model we conduct structural hypotheses under two different values for the cointegrating rank. When the cointegrating rank is set to two, the PPP and the UIP hypotheses are easily rejected, whereas we cannot reject the RIRP at the 5 per cent significance level. These results are somewhat modified when the cointegrating rank alternatively is set to three.

Date: 1998
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