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

June 1, 1999

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Format: Chicago

Klaas Knot, and Jan Marc Berk. Co-Movements in Long-Term Interest Rates and the Role of PPP-Based Exchange Rate Expectations, (USA: International Monetary Fund, 1999) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Exchange rates, Financial services, Foreign exchange, Interest rate parity, Long term interest rates, National accounts, Return on investment, Yield curve

Keywords: Cross-currency interest rate, Europe, Exchange rate expectations, Exchange rate movement, Exchange rates, Financial market, Global, Interest parity relations, Interest rate development, Interest rate differential, Interest rate parity, Interest rate run-up, Long term interest rates, Monetary policy, Return on investment, Risk premium, Run-ups in Europe, WP, Yield curve

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/081
Stock No:

WPIEA0811999
ISBN:

9781451850345
ISSN:

1018-5941

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