Co-Movements in Long-Term Interest Rates and the Role of PPP-Based Exchange Rate Expectations

Klaas Knot and Jan Berk

No 1999/081, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates international co-movement in bond yields by testing for uncovered interest parity (UIP). Existing work is supplemented by focusing on long instead of short-term interest rates and by employing exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the major currencies during 1975-97, the paper does not find a further increase in co-movement beyond that associated with the wave of financial market liberalization in the early 1980s. Given the similarity between PPP-based UIP tests and those employing actual exchange rate outcomes, the value added of the former lies mainly with data availability.

Keywords: WP; financial market; risk premium; monetary policy; interest parity relations; exchange rate expectations; interest rate differential; exchange rate movement; run-ups in Europe; interest rate development; cross-currency interest rate; interest rate run-up; Long term interest rates; Exchange rates; Yield curve; Interest rate parity; Return on investment; Europe; Global (search for similar items in EconPapers)
Pages: 28
Date: 1999-06-01
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