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Cointegration, Uncoverd Interest Parity and the Term Structure of Interest Rates: Some International Evidence

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  • Georgoutsos D.
  • Kouretas G.

Abstract

This paper addresses the issue of the empirical investigation of monetary policy independence as this is manifested in the inter–relationships between domestic and foreign money market interest rates. Instead of following an ad–hoc econometric approach, we have imposed a specific economic structure on the proposed model by establishing a link of the yield curves of two different countries through the Uncovered Interest Rate Parity, UIP. The expectations hypothesis of the term structure and the UIP imply certain overidentifying restrictions on the cointegrating space of a vector autoregressive process consisting of the interest rates of the two markets. The model has been tested on data from the domestic US money market and the euromark and euroyen markets. The main finding of our analysis is that we reject the overidentifying restrictions of the models for the USD/DEM case but we are unable to reject them for the USD/JPY case, at the one percent significance level and this implies that the term spreads of the euroyen market are being affected, in the long run, by changes of the US short Fed funds rate.

Suggested Citation

  • Georgoutsos D. & Kouretas G., 2002. "Cointegration, Uncoverd Interest Parity and the Term Structure of Interest Rates: Some International Evidence," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 7-22, January -.
    • Handle: RePEc:ers:journl:v:v:y:2002:i:1-2:p:7-22
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    Cited by:

    1. Christina Anderl & Guglielmo Maria Caporale, 2021. "Testing for UIP: Nonlinearities, Monetary Announcements and Interest Rate Expectations," CESifo Working Paper Series 9027, CESifo.
    2. Christina Anderl & Guglielmo Maria Caporale, 2022. "Testing for UIP-Type Relationships: Nonlinearities, Monetary Announcements and Interest Rate Expectations," Open Economies Review, Springer, vol. 33(4), pages 705-749, September.

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    More about this item

    Keywords

    cointegration; expectations theory; uncovered interest parity; eurocurrency markets; Granger causality;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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