(3) The implication is that the purchasing power parity condition is likely to be strongly related to the uncovered interest rate parity
. There is a large empirical literature that points to the adequacy of testing both parities jointly (Johansen and Juselius 1992; Juselius 1995; Camarero and Tamarit 1996; Juselius and MacDonald 2004).
Interest rate parity
provides a simple solution to the problem of translation.
interest rate parity
is a generally accepted theory, empirical research of exchange rate movements has shown that uncovered interest rate parity
Furthermore, theoretical work by Aliber (1973) finds that deviation from interest rate parity
is a function of both currency and political risks.
By making capital less scarce within the borders of Mexico, one would expect the capital controls to have a negative impact on the deviation from interest rate parity
. Consequently, the Dooley and Isard framework seems to be inappropriate in its original form to predict the impact of the Mexican capital policy.
We have gone one step further in resolving the forward rate bias puzzle by showing the theoretical rationale of FUH for forward market buyers of currency i, under an assumption of risk neutrality and interest rate parity
. We show it is theoretically possible for the forward exchange rates to be unbiased estimators of future corresponding spot rates for forward market buyers of currency i but not for both sellers and buyers.
For the Interest Rate Parity
to hold, coefficient P2 should be a statistically significantly positive value close to 1, and [alpha] = 0.
The theory of Interest Rate Parity
holds that one cannot make arbitrage profit by speculating in foreign exchange market due to different interest rate in different countries.
These include purchasing power parity (PPP), interest rate parity
(IRP), and variations of these two, such as relative PPP, ex ante PPP, and real interest rate parity
This paper uses Purchasing Power Parity (PPP) and Uncovered Interest Rate Parity
(UIP) to estimate a time-varying equilibrium for the $NZ/$US nominal exchange rate over the period 1992 to 2003.
It is often said that interest rate parity
determines exchange rates between currencies of different countries.
Table 1 presents five measures used in the literature to quantify the degree of capital mobility - (i) covered interest rate parity
(CIP), (ii) uncovered interest parity (UIP), (iii) real interest rate parity
(RIP), (iv) saving-retention coefficient (Feldstein and Horioka 1980), and (v) the offset coefficient (Argy and Kouri 1974 and Kouri and Porter 1974).