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Co-Movements in Long-Term Interest Rates and the Role of PPP-Based Exchange Rate Expectations

Author

Listed:
  • Klaas Knot
  • Jan Marc Berk

Abstract

This paper investigates international co-movement in bond yields by testing for uncovered interest parity (UIP). Existing work is supplemented by focusing on long instead of short-term interest rates and by employing exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the major currencies during 1975-97, the paper does not find a further increase in co-movement beyond that associated with the wave of financial market liberalization in the early 1980s. Given the similarity between PPP-based UIP tests and those employing actual exchange rate outcomes, the value added of the former lies mainly with data availability.

Suggested Citation

  • Klaas Knot & Jan Marc Berk, 1999. "Co-Movements in Long-Term Interest Rates and the Role of PPP-Based Exchange Rate Expectations," IMF Working Papers 1999/081, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1999/081
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