Non-Stationary Interest Rate Differentials and the Role of Monetary Policy
Philipp Matros and
No 450, University of Regensburg Working Papers in Business, Economics and Management Information Systems from University of Regensburg, Department of Economics
The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe, where we can validate the theoretical considerations by multivariate time series techniques.
Keywords: Uncovered Interest Rate Parity; Monetary Policy Rules; Cointegration; Vector-Error Correction Model (search for similar items in EconPapers)
JEL-codes: E44 F31 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Journal Article: Non-stationary Interest Rate Differentials and the Role of Monetary Policy (2014)
Working Paper: Non-Stationary Interest Rate Differentials and the Role of Monetary Policy (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bay:rdwiwi:18854
Access Statistics for this paper
More papers in University of Regensburg Working Papers in Business, Economics and Management Information Systems from University of Regensburg, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Gernot Deinzer ().