Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts

 

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dc.contributor.author Lacerda, Miguel Jorge Pery
dc.contributor.author Fedderke, Johannes W
dc.contributor.author Haines, Linda Margaret
dc.date.accessioned 2018-06-05T14:30:10Z
dc.date.available 2018-06-05T14:30:10Z
dc.date.issued 2010
dc.identifier http://dx.doi.org/10.1111/j.1813-6982.2010.01254.x
dc.identifier.citation Lacerda, M., Fedderke, J. W., & Haines, L. M. (2010). Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts. South African Journal of Economics, 78(4), 363-382.
dc.identifier.uri http://hdl.handle.net/11427/28230
dc.description.abstract Testing for purchasing power parity (PPP) and uncovered interest parity (UIP) has been the focus of many empirically oriented studies. While these simple economic theories of exchange rate and interest rate determination are theoretically attractive, the empirical support for these equilibrium conditions is at best mixed. Many potential reasons have been cited in the literature for the failure of such studies, ranging from market imperfections to inappropriate modelling strategies. The current state-of-the-art procedure involves testing for two cointegrating vectors in a multivariate error correction model which may be economically identified as the PPP and UIP relations. However, such a procedure does not account for policy regime shifts which distort the underlying PPP and UIP relations. In this paper, a Markov-switching vector error correction model (VECM) is considered for time series data in which monetary and exchange rate regime shifts are known to be present. Weak evidence in favour of PPP and UIP is established in a standard linear VECM, although the residuals of this model indicate that it is inappropriate in terms of functional form. The Markov-switching VECM, however, provides convincing evidence in favour of both the PPP and UIP relations and a marked improvement in the residual distributions.
dc.language.iso eng
dc.source South African Journal of Economics
dc.source.uri http://onlinelibrary.wiley.com/doi/10.1111/j.1813-6982.2010.01254.x/full
dc.subject.other F31
dc.subject.other F41 Purchasing power parity
dc.subject.other uncovered interest parity
dc.subject.other Markov-switching vector error correction model
dc.subject.other multivariate cointegration
dc.title Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts
dc.type Journal Article
dc.date.updated 2016-01-13T12:05:51Z
dc.publisher.institution University of Cape Town
dc.publisher.faculty Faculty of Science en_ZA
dc.publisher.department Department of Statistical Sciences en_ZA
uct.type.filetype Text
uct.type.filetype Image
dc.identifier.apacitation Lacerda, M. J. P., Fedderke, J. W., & Haines, L. M. (2010). Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts. <i>South African Journal of Economics</i>, http://hdl.handle.net/11427/28230 en_ZA
dc.identifier.chicagocitation Lacerda, Miguel Jorge Pery, Johannes W Fedderke, and Linda Margaret Haines "Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts." <i>South African Journal of Economics</i> (2010) http://hdl.handle.net/11427/28230 en_ZA
dc.identifier.vancouvercitation Lacerda MJP, Fedderke JW, Haines LM. Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts. South African Journal of Economics. 2010; http://hdl.handle.net/11427/28230. en_ZA
dc.identifier.ris TY - AU - Lacerda, Miguel Jorge Pery AU - Fedderke, Johannes W AU - Haines, Linda Margaret AB - Testing for purchasing power parity (PPP) and uncovered interest parity (UIP) has been the focus of many empirically oriented studies. While these simple economic theories of exchange rate and interest rate determination are theoretically attractive, the empirical support for these equilibrium conditions is at best mixed. Many potential reasons have been cited in the literature for the failure of such studies, ranging from market imperfections to inappropriate modelling strategies. The current state-of-the-art procedure involves testing for two cointegrating vectors in a multivariate error correction model which may be economically identified as the PPP and UIP relations. However, such a procedure does not account for policy regime shifts which distort the underlying PPP and UIP relations. In this paper, a Markov-switching vector error correction model (VECM) is considered for time series data in which monetary and exchange rate regime shifts are known to be present. Weak evidence in favour of PPP and UIP is established in a standard linear VECM, although the residuals of this model indicate that it is inappropriate in terms of functional form. The Markov-switching VECM, however, provides convincing evidence in favour of both the PPP and UIP relations and a marked improvement in the residual distributions. DA - 2010 DB - OpenUCT DP - University of Cape Town J1 - South African Journal of Economics LK - https://open.uct.ac.za PB - University of Cape Town PY - 2010 T1 - Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts TI - Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts UR - http://hdl.handle.net/11427/28230 ER - en_ZA


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