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Testing uncovered interest parity at short and long horizons

Menzie Chinn () and Guy Meredith

No 102, HWWA Discussion Papers from Hamburg Institute of International Economics (HWWA)

Abstract: The unbiasedness hypothesis - the joint hypothesis of uncovered interest parity (UIP) and rational expectations - has been almost universally rejected in studies of exchange rate movements. In contrast to previous studies, which have used short-horizon data, we test this hypothesis using interest rates on longer-maturity bonds for the G-7 countries. The results of these long-horizon regressions are much more positive - the coefficients on interest differentials are of the correct sign, and almost all are closer to the predicted value of unity than to zero. These results are robust to changes in data type and to base currency (i.e., Deutschemark versus US dollar). We appeal to an econometric interpretation of the results, which focuses on the presence of simultaneity in a cointegration framework.

Keywords: International Investment; Long-Term Capital Movements; Foreign Exchange; Open Economy Macroeconomics (search for similar items in EconPapers)
JEL-codes: F21 F41 F31 (search for similar items in EconPapers)
Date: 2000
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