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Foreign investors' changing appetite for risk-taking has been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of uncovered interest parity (UIP) premia, capital flows, and exchange rates. To understand how these risk sentiment changes transmit across borders, we propose a two-country macroeconomic framework. Our model features cross-border holdings of risky assets by U.S. financial intermediaries that operate under financial frictions and act as global intermediaries in that they take on foreign asset risk. In this setup, an exogenous increase in U.S.-specific uncertainty, modeled as higher volatility in U.S. assets, leads to higher risk premia in both countries. This occurs because higher uncertainty leads to deleveraging pressure on U.S. intermediaries, triggering higher global risk premia and lower global asset values. Moreover, when U.S. uncertainty rises, the exchange rate in the foreign country vis-a-vis the dollar depreciates, capital flows out of the foreign country, and the UIP premium increases in the foreign country and decreases in the U.S., as in the data.

This paper provides an econometric analysis of the short-run impact of interest rates on the Swiss franc exchange rate covering the period January 2001 to June 2011 using daily data. Our model includes both the exchange rate of the Swiss franc against euro and dollar and uses the plausible assumption that foreign interest rates and the euro-dollar exchange rate are exogenous. In addition, we consider not only money market interest differentials, but also those for 2 and 10 year governments bonds. GMM estimation indicates that a one-percentage point increase in the 3-month Swiss franc Libor rate leads to a 3.7 % appreciation of the Swiss franc against euro and dollar. This result seems to be robust with respect to considering only increasing or decreasing interest rates and omitting data around SNB target band adjustments. Our findings appear reasonable and are between the extremely low and high estimates of the impact of Swiss interest rate changes on the exchange rate reported in the literature.

Die Arbeit zeigt einen Ansatz zur Vorhersage von möglichen Wechselkursen. Dabei werden das Keynesianische Modell der Zinsparität und sogenannte Stochastische Prozesse verwendet. Bei der Erstellung des Modelles wird dabei untersucht ob der Devisenmarkt normalverteilt ist, wie oftmals angenommen oder hier andere passendere Verteilungen zur Verfügung stehen. Weiters folgt eine Analyse der Auswirkungen von Leitzinsen auf die Realwirtschaft. Es zeigt sich, dass die Zentralbanken hier bestimmten Regeln folgen. Grundlage des Prognosemodells ist die Geometrische Brownsche Bewegung, welche in weiterer Folge erweitert wird um am Ende auf Lévy-Prozesse und Fat-Tailed-Verteilungen zu stoßen. This master thesis offers an approach to predict potential currency exchange rates using the Keynesian interest rate parity model and so called stochastic processes. During the creation of the model it is examined whether the foreign exchange market is Gaussian distributed, as often assumed or other more suitable distributions are available here. An analysis of the effects of cash rates and their impact on the real economy follows. It turns out that central banks follow certain rules here. The basis of the forecast model is the Brownian Geometric Movement, which is subsequently extended to finally encounter Lévy processes and fat-tailed distributions. vorgelegt von Johann Frank Webersberger Wien, FH Campus Wien, Masterarb., 2018

The aim of the paper is to verify whether the USD/EUR exchange rate market is efficient. The fundamental parity condition for testing foreign exchange market efficiency is represented by the uncovered interest-rate parity (UIP). Therefore, the UIP hypothesis verification accounts for the crucial part of the paper. The efficiency of the USD/EUR market is tested by applying the conventional UIP regression approach and orthogonality test of the forward rate forecast error. The results show that it is hard to say definitely that USD/EUR foreign exchange market is inefficient. The slope coefficient in UIP regression occurs to be negative, which implies the failure of uncovered interest-rate parity. However, there are no foundations to reject the UIP hypotheses in the time of financial crisis of 21st century. Moreover, the article presents that the forward forecast error is not orthogonal to both its lagged value and the interest rate differential. Thus, the semi-strong foreign exchange market efficiency hypothesis is rejected for the USD/EUR market.

We sort currencies by countries’ consumption growth over the past four quarters. Currency portfolios of countries experiencing consumption booms have higher Sharpe ratios than those of countries going through a consumption-based recession. A carry strategy that goes short in countries that are in a consumption bust and goes long in countries with a consumption boom yields consistently positive excess returns. This excess return compensates for the risk of high negative returns in worldwide downturns. Our consumption carry factor prices the cross section of portfolios of currencies sorted on various characteristics (consumption, interest rates) and also does well on the cross section of bilateral currency movements. Eventually, a habit formation model allows to interpret these results: sorting currencies on past consumption growth is akin to sorting countries on risk aversion, and low (high) risk aversion currencies depreciate (appreciate) in times of global turmoil.

We test Uncovered Interest Parity (UIP) using LIBOR interest rates for a wide range of maturities. In contrast to other markets, LIBOR markets have minimal frictions which could lead to rejecting UIP. Using panel unit root test suggested by Palm, Smeekes, and Urbain (2010) and cointegration techniques by Westerlund (2007), we find that UIP holds for short-term maturities, when market-specific heterogeneity is controlled for. Furthermore, the estimation results show that the speed of adjustment to the long-run equilibrium is proportional to the maturity of the underlying instrument.

In this paper, I analyze determinants of carry trade returns in Central and Eastern Europe (CEE). I show that carry trades to CEE were lucrative due to interest rate spreads between the funding and investment currency from 2004 to 2006. They became unprofitable when liquidity risk and exchange rate volatility increased after 2007. The analysis suggests that the exchange rate regime of the CEE economy matters for carry trade returns. Overall, exchange rate stabilization, particularly via managed floats, seems to allow for the highest profit opportunities.

We study the empirical determinants of China's capital flight. In addition to the covered interest differential, our empirical exercise includes a rather exhaustive list of macroeconomic variables and a few institutional factors. Overall, our regression exercise shows that China's capital flight is quite well explained by its own history and covered interest differentials. The other possible determinants offer relatively small additional explanatory power. It is also found that China's capital flight responds differently to the components of covered interest differentials and to the positive and negative components of these variables. The response pattern, however, depends on the choice of data frequency. The general impression is that the monthly results are more intuitive than the quarterly ones.

New Zealand real interest rates have on average over the past two decades been high relative to most other countries in the Organisation for Economic Co-operation and Development (OECD). This paper argues that New Zealand's relatively high interest rates are currently the outcome of domestic saving and investment imbalances, and are less due to a risk premium being imposed by foreign investors. That is, New Zealand's low rate of saving relative to investment make higher real interest rates necessary to maintain inflation within the target range in the face of higher domestic spending. Foreign inflows seek out the interest rate premium, rather than demand it as compensation for risk. Seeking out the higher yield, foreign capital flows into New Zealand and this puts upward pressure on the exchange rate. It is this relationship between the real exchange rate, exchange rate expectations and the real interest rate that has helped to cause New Zealand's interest rate to deviate from the "world" rate for most of the past two decades.

The real interest partity (RIP) condition combines two cornerstones in international finance, uncovered interest parity (UIP) and ex ante purchasing power parity (PPP). The extent of deviation from RIP is therefore an indicator of the lack of product and financial market integration. This paper investigates whether the nominal exchange rate regime has an impact on RIP. The analysis is based on 15 annual real interest rates and covers a long time span, 1870-2006. Four subperiods are distinguished and linked to fixed and flexible exchange rate regimes: the Gold Standard, the interwar float, the Bretton Woods system and the current managed float. Panel integration techniques are used to increase the power of the tests. Cross section correlation is embedded via common factor structures. The results suggest that RIP holds as a long run condition irrespectively of the exchange rate regimes. Adjustment towards RIP is affected by the institutional framework and the historical episode. Half lives of shocks tend to be lower under fixed exchange rates and in the first part of the sample, probably due to higher price flexibility before WWII. Although barriers to foreign trade and capital controls were substantially removed after the collapse of the Bretton Woods system, they did not lead to lower half lives during the managed float.

In this paper we re-investigate the comovements of interest rates in the G7-countries. We propose a structured modus operandi to analyze the time series characteristics of interest rates and to test for common features. We conduct cointegration, serial correlation common feature and codependence tests with nominal and real interest rates using quarterly data from 1975 to 2007. Overall we only find little evidence of comovements. Common trends are occasionally observed, but the majority of interest rates are not cointegrated. Although some evidence for codependence of higher order is found among European countries, common cycles appear to exist only in rare cases and cannot be generalized for all interest rates.

In this paper we analyzed the violations of UIP for the Swiss Franc against the Dollar, the Euro, the Yen, the NEWLINE Pound and the Canadian Dollar using recent data up to fall 2008. This exercise provides the following main NEWLINE results : first the Swiss interest rate puzzle disappeared, i.e. mean returns on Swiss Franc assets are no longer NEWLINE systematically and significantly lower (as in the 1980 – 1998 sample) when compared jointly with other NEWLINE major currencies in the 1999 to 2008 period. Second and in contrast to earlier evidence we failed to find NEWLINE evidence that geopolitical crises lead to an appreciation of the Swiss Franc in the last ten years. Third even NEWLINE the short run validity of UIP cannot be rejected for the Swiss Franc against the five currencies for the 1999 – NEWLINE 2008 sample. Unfortunately our attempt to locate the time of change and the currencies involved by the NEWLINE application of tests for structural breaks with unknown break point did not lead to clear cut conclusion for the NEWLINE Euro and the Dollar, the two most important foreign currencies from a Swiss perspective.

According to the Uncovered Interest Parity (UIP) condition, interest rate differentials compensate for expected exchange rate changes, equalizing the expected returns from holding assets which only differ in terms of currency denomination. In the previous literature, there are many tests of UIP for industrialized countries, and, more recently, some tests for emerging economies. However, due to data availability problems, poorer developing countries have not been studied. This paper tests UIP in a partially dollarized economy, Bolivia, where bank accounts only differ in terms of currency denomination (U.S. dollars or bolivianos). I find that UIP does not hold in Bolivia, but that the deviations are smaller than in most other studies of developed and emerging economies. Moreover, several factors seem to contribute to the deviations from UIP. The so-called peso problem could possibly account for the observed data, but there is also evidence of a time-varying risk premium, as well as deviations from rational expectations.

This paper analyses the monetary policy interdependence between the European Central Bank (ECB) and the Federal Reserve (Fed) for the period 1999-2006. Two models are specified: a partial Vector Error Correction Model (VECM) and a general VECM. In the partial VECM, we look for a long-run interdependent relationship between the interest rates of the two currency areas and specify the Taylor Rule terms as exogenous variables. In the general VECM, we regard all variables as endogenous, and look for long-run equilibrium relationships among them, which may reveal monetary policy interdependence between the two central banks. Weak exogeneity is checked in both models in order to establish a possible leader-follower relationship. The empirical results of both models indicate interdependence between the ECB and the Fed, but only the general VECM testifies a leader-follower pattern between the two central banks. According to this pattern, the ECB does follow the Fed.

Studying all possible pairs of eleven major currencies and eleven portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.

This paper analyzes de-facto integration in some Emerging Market Economies based on behavior of deviations from Covered Interest Parity in the last decade. An Asymmetric Self Exciting Threshold Autoregressive model is used to estimate bands of speculative inaction. The estimated bands follow the pattern expected, and reveal a rational market in the sense that deviations from parity are self correcting. The paper uses information from the estimated models to construct a new index of de-facto integration. Such a price-based measure of integration is crucial to studies of effectiveness of controls and of impact of capital openness on macroeconomic variables.

Using count-data techniques, this paper studies the determinants of currency choice in the issuance of foreign-currency-denominated bonds. In particular, we investigate whether bond issuers choose their issuance currency in order to exploit the borrowing-cost savings associated with deviations from uncovered and covered interest parity. Our sample includes issuers from both the public sector and private sector. Our findings show that the choice of issuance currency is sensitive to deviations from uncovered interest parity but insensitive, in general, to deviations from covered interest parity. Furthermore, the influence of deviations from uncovered interest parity is stronger for financial issuers than for nonfinancial issuers.

This paper revisits the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004), who show that if there exist nominal price rigidities and private sector credit constraints, and the credit multiplier depends on real interest rates, then the optimal monetary policy response to the threat of a currency crisis is restrictive. We demonstrate that this result is primarily due to the uncovered interest parity assumption. Assuming that the exchange rate is a martingale restores the case for expansionary reaction - even with foreign-currency debt in firms' balance sheets. The effect of lower interest rates on output can help restore the value of the currency due to increased money demand.

This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence profiles. We find strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.

Nowadays researchers can choose the sampling frequency of exchange rates and interest rates. If the number of observations per contract period is large relative to the sample size, standard GMM asymptotic theory provides unreliable inferences in UIP regression tests. We specify a bivariate continuous-time model for exchange rates and forward premia robust to temporal aggregation, unlike the discrete time models in the literature. We obtain the UIP restrictions on the continuous-time model parameters, which we estimate efficiently, and propose a novel specification test that compares estimators at different frequencies. Our empirical results based on correctly specified models reject UIP., De nos jours, les chercheurs peuvent choisir la fréquence d'échantillonnage des taux de change et des taux d'intérêt. Si la période couverte par le contrat compte un nombre d'observations élevé par rapport à la taille de l'échantillon, le recours à une approximation asymptotique pour tester l'hypothèse de parité des taux d'intérêt non couverte à l'aide de la méthode des moments généralisés peut conduire à des conclusions fallacieuses. Le modèle en temps continu que définissent les auteurs pour l'évolution du taux de change et du report n'est pas sensible à l'agrégation temporelle, contrairement à ceux en temps discret que l'on trouve dans la littérature. Les auteurs obtiennent des estimations efficaces des paramètres du modèle en temps continu, en testant les restrictions associées à la parité des taux d'intérêt non couverte, et proposent un test de spécification novateur qui permet de comparer les estimateurs à différentes fréquences. Les résultats empiriques tirés de l'estimation de modèles bien spécifiés conduisent au rejet de la parité des taux non couverte.

This paper revisits financial market integration in the European Economic and Monetary Union, using a threshold vector error-correction model (TVECM) for a fixed rolling window. This approach enables us to analyze the dynamics of transaction costs and detect any co-movements with (policy induced) changes in the financial environment. The TVECM methodology is applied on interest rates from different financial markets (government bonds, deposits, loans and mortgages) in Germany, France, Italy, Belgium and the Netherlands for the 1980-2006 period. Our main finding is that only for some country pairs and financial market segments there is evidence in support of financial integration.

This paper tests for uncovered interest parity (UIP) at distant horizons for the US and its main trading partners, including both mature and emerging market economies, also exploring the existence of nonlinearities. At long and medium horizons, it finds support in favour of the standard, linear, specification of UIP for dollar rates vis-à-vis major floating currencies, but not vis-à-vis emerging market currencies. Moreover, the paper finds evidence that, not only yield differentials widen, but that US bond yields do react in anticipation of exchange rate movements, notably when these take place vis-à-vis major floating currencies. Last, the paper detects signs of nonlinearities in UIP at the mediumterm horizon for dollar rates vis-à-vis some of the major floating currencies, albeit surrounded by some uncertainty.

This study examines differences in the interest rate response to an ECB policy impulse in the euro area, the new EU-member states, and in the other non-eurozone EU countries in order to gauge the degree of interest rate alignment in Europe. To this end, PANIC, a Panel Analysis of Non-stationarity in I diosyncratic and Common components, is employed in a structural factor set-up. Under the assumption that the ECB sets the short end of the yield curve, the analysis shows that : (i) The response of Europe's money and government bond markets to new information can be summarized by two common stochastic trends and one stationary common factor, which together explain more than 68% of the overall variation of the two market segments; (ii) one of the factor innovations can be associated with the ECB's policy stance, which strongly affects the short end of the euro area's yield curve; (iii) compared to the euro area, the short-term market segments in the new EU-member states react, on average, 12% more weakly to the monetary policy signal, whereas these countries' long-term government bond yields respond up to 25% more strongly to such a common innovation.

We characterize the relationship between ex post exchange rate depreciation and the interest differential for a set of countries that spans both developed and emerging market economies. Measured ex post uncovered interest differentials are then related to measures of trade and financial openness, financial development, government budget balances, institutional development, and exchange rate regimes. We find that there is wide diversity in the coefficient relating depreciations and interest differentials. Some of these differing results can be attributed to differences in inflation rate, inflation volatility, capital account openness, legal development, and the nature of the exchange rate regime.

This paper investigates the capital market relations between Euroland and the USA from 1990 until 2006. Formally based on the uncovered interest rate parity (UIP), backward recursive estimations establish a long-run equilibrium between European and US government bond yields. Since the mid-1990s though, cointegration can only be achieved additionally considering the exchange rate. The reason proves a stochastic trend common to the European interest and the exchange rate, consistently explained by central bank reactions and unfinished learning processes on the role of the euro. Furthermore, the US capital market dominance is strongly reduced, leading to transatlantic interdependence at eye level.

One argument for floating the Chinese renminbi (RMB) is to insulate China's monetary policy from the US effect. However, we note that both theoretical considerations and empirical results do not offer a definite answer on the link between exchange rate arrangement and policy dependence. We examine the empirical relevance of the argument by analyzing the interactions between the Chinese and US interest rates. Our empirical results, which appear robust to various assumptions of data persistence, suggest that the US effect on the Chinese interest rate is quite weak. Apparently, even with its de facto peg to the US dollar, China has alternative measures to retain its policy independence and de-link its interest rates from the US rate. In other words, the argument for a flexible RMB to insulate China's monetary policy from the US effect is not substantiated by the observed interest rate interactions.

this paper analyzes two effects which might have an important impact on a reduction of global external imbalances. These are valuation effects on the one hand and interest rate effects on the other hand. We use a four-region model that is based on the models by Obstfeld and Rogoff (2005) and Oberpriller (2007) to analyze the difference in the occurring exchange rate changes with and without valuation and interest rate effects under two different scenarios of narrowing global imbalances. The outcome is a reduced need for real dollar depreciation because the United States will largely benefit from valuation gains on their foreign assets while the effect that stems from interest rate changes works in the opposite direction but is not as strong as the valuation effect. The magnitude of valuation and interest rate effects reduce the need for real exchange rate depreciation by two to four percentage points.

The strong response of long-term interest rates to macroeconomic shocks has typically been explained in terms of informational asymmetries between the central bank and private agents. The standard models assume that the equilibrium real interest rate is constant over time and independent of structural shocks. We incorporate time-variation in the equilibrium real interest rate as function of structural shocks to e.g. productivity and demand. This extended model implies that forward interest rates at long horizons move about 40 basis points as the short-term interest rate increases one percentage point. In terms of regressions of changes in long-term interest rates on changes in the short-term interest rate, including a time-varying equilibrium real interest rate explains about half of the puzzle.

We provide a methodology to disentangle the long-run relation between variables from their own dynamics. Macroeconomic and aggregate financial series have a high degree of inertia. If this persistence is not properly accounted for, spurious correlations will give rise to paradoxes. Our procedure shows that the Uncovered Interest Parity (UIP) puzzle evaporates when the dynamics are properly modelled: the forward premium loses all the predictive power that it seemed to have. We also show how the stock market grows in long cycles around a trend given by GDP, in a stable relation that does not break.

A system of U.S. and euro area short- and long-term interest rates is analyzed. According to the expectations hypothesis of the term structure the interest rate spreads should be stationary and according to the uncovered interest rate parity the difference between the U.S. and euro area longterm interest rates should also be stationary. If all four interest rates are integrated of order one, one would expect to find three linearly independent cointegration relations in the system of four interest rate series. Combining German and European Monetary Union data to obtain the euro area interest rate series we find indeed the theoretically expected three cointegration relations, in contrast to previous studies based on different data sets.

By employing Lucas’ (1982) model, this study proposes an arbitrage relationship – the Uncovered Equity Return Parity (URP) condition – to explain the dynamics of exchange rates. When expected equity returns in a country/region are lower than expected equity returns in another country/region, the currency associated with the market offering lower returns is expected to appreciate. First, we test the URP assuming that investors are risk neutral and next we relax this hypothesis. The resulting risk premia are proxied by economic variables, which are related to the business cycle. We employ differentials in corporate earnings’ growth rates, short-term interest rate changes, annual inflation rates, and net equity flows. The URP explains a large fraction of the variability of some European currencies vis-à-vis the US dollar. When confronted with the naïve random walk model, the URP for the EUR/USD performs better in terms of forecasts for a set of alternative statistics.

The variance of real interest rate differentials (rids) is decomposed between ex post deviations from relative purchasing power parity and uncovered interest rate parity (UIRP) for a set of emerging markets from 1995M5 to 2004M3. The results point out to

The paper presents evidence that the simultaneous relationship between uncovered interest rate parity (UIP) and a monetary policy function can explain the empirical failure of the former. Using the model proposed by McCallum (1994), we carry out tests for a sample of developed and emerging markets from 1995M5 to 2004M3. The results lend strong support to the view that monetary policy affects the equilibrium nominal interest rate differential between emerging economies and the US. Slow adjustment in interest rates and reaction against price changes seem to be the prominent features of the reaction function. Shocks have an asymmetric impact on the volatility of the differentials which is also significant to explain monetary policy. Finally, the dynamic properties of uncovered interest rate parity ex post deviations, also interpreted as risk premium, influence the equilibrium nominal interest rate differentials.

A test of speculative efficiency on the foreign exchange markets of Poland, the Czech Republic, Hungary and the Slovak republic was unable to identify a cointegration relationship between forward and spot rates against the euro for the period between 1999 and mid-2002. Econometric studies confirm the existence of a time-variable exchange rate premium in all of the above countries. However, information and transaction costs also appear to be responsible for the observed deviations from speculative efficiency. The segmentation of the foreign exchange markets is likely to hamper the coordination of national monetary and foreign exchange policies within ERM II. In addition, this segmentation increases uncertainty in setting the central rate against the euro. Im Rahmen eines Tests der spekulativen Effizienz auf den Devisenmärkten Polens, der Tschechischen Repubik, Ungarns und der Slowakei kann für den Beobachtungszeitraum von 1999 bis Mitte 2002 keine Kointegrationsbeziehung zwischen Termin- und Kassakursen gegenüber dem Euro nachgewiesen werden. Ökonometrische Untersuchungen bestätigen die Existenz einer zeitvariablen Wechselkursprämie in allen genannten Ländern. Darüber hinaus scheinen aber auch Informations- und Transaktionskosten verantwortlich zu sein für die beobachteten Abweichungen von der spekulativen Effizienz. Die Segmentierung der Devisenmärkte dürfte die Koordinierung der nationalen Geld- und Währungspolitiken innerhalb des WKM II erschweren. Zusätzlich erhöht sie die Unsicherheit bei der Festlegung des Leitkurses gegenüber dem Euro.

This paper analyzes deviations from uncovered interest rate parity which are interpreted as indicator of the substitutability of currencies. Backward recursive statistical tests and error correction models are applied to study the co-movement of interest rates, and rolling regressions are used to illustrate size and volatility of country specific risk premia. In accordance to their degree of monetary integration with the Euro area, EU acceding and accession countries are divided into three groups. Additionally, the results show that uncovered interest rate parity is well supported by empirical evidence if it is augmented by a country-specific risk premium.

Recently a variety of exchange and interest rate models capturing the dynamics during the transition from an exchange rate arrangement of floating rates into a currency union have been derived. While these stochastic equilibrium models in continous time are theoretically rigorous, a systematic and extensive empirical validation is still lacking. Using exchange and interest rate data collected prior to the Greek EMU-entrance on 1 January 2001 this paper tries to fill the gap between theory and real-world data. The analysis reveals that the formal models can explain many features of the Greek exchange and interest rate dynamics on the road to EMU.

Evidence is presented on the Real Interest Parity Hypothesis for a set of emerging and developed countries. This is done by carrying out a set of unit-root tests on the real interest differentials with respect to Germany and the US. Our results support the hypothesis of a rapid reversion towards a zero differential for developed countries and towards a positive one for emerging markets. An important result is that this adjustment tends to be highly asymmetric and markedly different for developed and emerging countries. Our evidence reveals a high degree of market integration for developed countries and highlights the importance of risk premia for emerging markets.

Based on the concept of covered interest parity it is shown that the money markets in Poland, the Czech Republic, Hungary, and the Slovak Republic meanwhile display a high degree of international integration with the euro area. Integration has strengthened continuously in the review period of 1999 to mid 2002. The segmentation that could still be observed stems from both restrictions on the short-term movement of capital and the limited development of the financial sectors in the four accession countries. While almost all capital controls have since been removed and will no longer play a role after accession to the EU, the implementation and transmission of the single monetary policy within the Eurosystem will possibly be impeded, if the financial sectors in CEE are then still underdeveloped. Basierend auf dem Konzept der gedeckten Zinsparität wird gezeigt, dass die Geldmärkte in Polen, der Tschechischen Republik, Ungarn und der Slowakei inzwischen einen hohen Grad an internationaler Integration mit dem Euro-Raum aufweisen. Die Integration hat sich im Untersuchungszeitraum von 1999 bis Mitte 2002 kontinuierlich verstärkt. Für die noch zu beobachtende Segmentierung sind sowohl Beschränkungen des kurzfristigen Kapitalverkehrs als auch die geringe Entwicklung der Finanzsektoren in den Beitrittsländern verantwortlich. Während Kapitalverkehrskontrollen inzwischen fast vollständig abgebaut sind und nach einem EU-Beitritt keine Rolle mehr spielen werden, könnte innerhalb des Eurosystems die Implementierung und Transmission der gemeinsamen Geldpolitik beeinträchtigt werden, wenn die Finanzsektoren in Mittel- und Osteuropa noch unterentwickelt sind.

Basierend auf dem Konzept der gedeckten Zinsparität wird gezeigt, dass die Geldmärkte in Polen, der Tschechischen Republik, Ungarn und der Slowakei inzwischen einen hohen Grad an internationaler Integration mit dem Euro-Raum aufweisen. Die Integration hat sich im Untersuchungszeitraum von 1999 bis Mitte 2002 kontinuierlich verstärkt. Für die noch zu beobachtende Segmentierung sind sowohl Beschränkungen des kurzfristigen Kapitalverkehrs als auch die geringe Entwicklung der Finanzsektoren in den Beitrittsländern verantwortlich. Während Kapitalverkehrskontrollen inzwischen fast vollständig abgebaut sind und nach einem EU-Beitritt keine Rolle mehr spielen werden, könnte innerhalb des Eurosystems die Implementierung und Transmission der gemeinsamen Geldpolitik beeinträchtigt werden, wenn die Finanzsektoren in Mittel- und Osteuropa noch unterentwickelt sind. Based on the concept of covered interest parity it is shown that the money markets in Poland, the Czech Republic, Hungary, and the Slovak Republic meanwhile display a high degree of international integration with the euro area. Integration has strengthened continuously in the review period of 1999 to mid 2002. The segmentation that could still be observed stems from both restrictions on the short-term movement of capital and the limited development of the financial sectors in the four accession countries. While almost all capital controls have since been removed and will no longer play a role after accession to the EU, the implementation and transmission of the single monetary policy within the Eurosystem will possibly be impeded, if the financial sectors in CEE are then still underdeveloped.

Im Rahmen eines Tests der spekulativen Effizienz auf den Devisenmärkten Polens, der Tschechischen Repubik, Ungarns und der Slowakei kann für den Beobachtungszeitraum von 1999 bis Mitte 2002 keine Kointegrationsbeziehung zwischen Termin- und Kassakursen gegenüber dem Euro nachgewiesen werden. Ökonometrische Untersuchungen bestätigen die Existenz einer zeitvariablen Wechselkursprämie in allen genannten Ländern. Darüber hinaus scheinen aber auch Informations- und Transaktionskosten verantwortlich zu sein für die beobachteten Abweichungen von der spekulativen Effizienz. Die Segmentierung der Devisenmärkte dürfte die Koordinierung der nationalen Geld- und Währungspolitiken innerhalb des WKM II erschweren. Zusätzlich erhöht sie die Unsicherheit bei der Festlegung des Leitkurses gegenüber dem Euro. A test of speculative efficiency on the foreign exchange markets of Poland, the Czech Republic, Hungary and the Slovak republic was unable to identify a cointegration relationship between forward and spot rates against the euro for the period between 1999 and mid-2002. Econometric studies confirm the existence of a time-variable exchange rate premium in all of the above countries. However, information and transaction costs also appear to be responsible for the observed deviations from speculative efficiency. The segmentation of the foreign exchange markets is likely to hamper the coordination of national monetary and foreign exchange policies within ERM II. In addition, this segmentation increases uncertainty in setting the central rate against the euro.

Tentative evidence suggests that the empiricalfailure of uncovered interest parity (UIP) is confined to short-term interest rates. Tests of UIP for long-term interest rates are however hampered by various data problems. By focusing on short investments in long-term bonds, these data problems can be avoided. We study the relationship between the US dollar - Deutsch Mark exchange rate and German and American bond rates. The hypothesis that expected returns to investments in bonds denominated in the two currencies are equal cannot be rejected. This result is not simply due to low power as the beta-coefficients are close to unity. For the corresponding short-term interest rates, the typical finding of a large and significantly negative beta-coefficient is confirmed.

This paper contributes to the debate about the puzzle of the Swiss Interest Rate Island. It starts out by establishing some stylized facts about the nature of the puzzle. First it shows that long run real returns on Swiss Euro Deposits have been significantly lower than in any other major currency. A decomposition of return differentials into deviations from uncovered interest rate parity and deviations from purchasing power parity reveals that the former contributes most to the puzzle. Two implications follow from these stylized facts: (i) since the puzzle is present in Euro Deposit rates it cannot be due to local factors such as banking secrecy, and (ii) solutions to the puzzle have to provide an explanation for a long run failure of uncovered interest rate parity rather than for real appreciation. Historical evidence is presented that suggests the puzzle may be attributed to a reverse peso problem. The paper discusses the consequences of this interpretation for Swiss monetary and exchange rate policy. Diese Arbeit leistet einen Beitrag zu der Debatte über das Rätsel ?Zinsinsel Schweiz? indem es stilisierte Fakten über die Natur dieses Rätsels dokumentiert. Als erstes wird aufgezeigt, dass die langfristigen realen Erträge auf Schweizer Euro Einlagen deutlich niedriger waren als in anderen Hauptwährungen. Eine Zerlegung der Ertragsunterschiede in Abweichungen von der ungedeckten Zinsparität und Abweichungen von Kaufkraftparität enthüllt, dass der erste Faktor den Hauptanteil am Rätsel trägt. Zwei Folgerungen ergeben sich daraus: (i) nachdem sich dieses Rätsel in Euro Einlagen zeigt, kann es nicht durch nationale Eigenschaften wie z.B. das Bankgeheimnis verursacht werden, und (ii) Lösungen für dieses Rätsel müssen eine Erklärung für das langfristige Versagen der ungedeckten Zinsparität liefern und nicht für die reale Wertsteigerung. Aufgrund von historischen Datenreihen folgern wir, dass das Rätsel auf ein ?Peso Problem? zurückzuführen ist und diskutieren die Konsequenzen für die schweizerische Geld- und Wechselkurspolitik.

The co-movements of nominal exchange rates and short-term interest rates as the economy is hit by shocks is a potential source of ex post deviations from uncovered interest rate parity. This paper investigates whether an established model of endogenous monetary policy in an open economy is capable of explaning the exchange rate risk premium puzzle. Time series on interest differentials and exchange rate changes are generated from the Svensson (2000) model. Uncovered interest rate parity is tested on the simulated data and the b-coefficients are investigated. For most realistic choices of parameter values, the b-coefficients are positive but much smaller than the unity value expected from UIP. It is however also possible to obtain large, negative b-coefficients if the central bank is engaged in interest rate smoothing.

Modelling the Norwegian exchange rate against a basket of currencies, we find a robust long-term link between the real exchange rate and real interest differential that is consistent with purchasing power parity (PPP) and uncovered interest parity (UIP). However, PPP alone is rejected. These findings are confirmed focusing on the Norwegian bilateral exchange rate with Germany and (possibly) Sweden, but rejected against the UK and the US. We argue that rejection of bilateral relationships may result from idiosyncratic shocks in the different countries that may be negligible when modelling against a basket of currencies.

This paper uses Markov switching models to study short-run movements of the Polish zloty and speculative phenomena in Poland, that is, to investigate whether the exchange rate is "contaminated" by a speculative bubble. The zloty movements are examined in terms of so-called long swings - periods of prevailing appreciation and depreciation of the exchange rate. Speculative fluctuations of the zloty are investigated within two different frameworks: the uncovered interest parity hypothesis and a model of a zloty bubble. The results obtained suggest that the zloty exchange rate is characterised by interweaving periods of appreciation and depreciation with different durations. The uncovered interest parity hypothesis does not hold. Periods were identified, in which the zloty exhibited "bubble properties".

This paper analyzes purchasing power parity and uncovered interest parity in the laboratory. It finds strong evidence that purchasing power parity, covered interest parity, and uncovered interest parity hold. Subjects are endowed with an intrinsically useless (green) currency that can be used to purchase another useless (red) currency. Green goods can be bought only with green currency, and red goods can be bought only with red currency. The foreign exchange markets are organized as call markets. In the treatment analyzing purchasing power parity, the price of the red good varies. In a second treatment, the interest rate on red currency varies. In a third treatment, the interest rate on red currency varies, and the price of the red good is random.

This paper investigates how US and European equity markets affected the US dollar-euro rate from the introduction of the euro through April 2001. More detailed the following questions are raised: First, do movements in the stock market help to explain movements in the exchange rate? Second, how large is the impact of stock market returns on the exchange rate? And third, does the exchange rate respond differently to different equity markets? The investigation was carried out using daily data within a vector-autoregression model (VAR). Surprisingly, positive returns on US equities as well as on European stock markets had a negative impact on the US dollar-euro rate. Quantitatively, the US dollar-euro rate seems to be more influenced by European stock markets compared to US stock markets. Further, there is evidence for a somewhat weaker impact of technology stock indices on the US dollar-euro rate compared with broader market indices. Finally, the long-term interest rate differential seems to contain more information about exchange rate movements than the short-term interest rate differential. This Version: August, 2001. Klassifikation: C32, F31