Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts
| 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.date.updated | 2016-01-13T12:05:51Z | |
| 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.identifier | http://dx.doi.org/10.1111/j.1813-6982.2010.01254.x | |
| 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.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.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 |
| dc.identifier.uri | http://hdl.handle.net/11427/28230 | |
| 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.language.iso | eng | |
| dc.publisher.department | Department of Statistical Sciences | en_ZA |
| dc.publisher.faculty | Faculty of Science | en_ZA |
| dc.publisher.institution | University of Cape Town | |
| 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 | |
| uct.type.filetype | Text | |
| uct.type.filetype | Image |