International Parity Relationships and a Nonstationarity Real Exchange Rate: Germany Versus the US in the Post Bretton Woods Period

Katarina Juselius, Ronald Macdonald

Research output: Working paperDiscussion paper

Abstract

This paper examines the interrelations between purchasing power parity, uncovered interest parity, the term structure of interest rates and the Fisher real interest rate parity condition using cointegration analysis. Dynamic adjustment and feed-back effects are estimated jointly in a full system of equations. An important finding is that the very slow, though significant, price adjustment towards sustainable levels of real exchange rates, has been compensated by corresponding changes in the spread of long-term bond rates. Related to this is the strong empirical support for the weak exogeneity of long-term bond rates, signifying the importance of the large US trade deficits (i.e. the low levels of US savings) and, hence, their linkage to international finance. Altogether, the results suggest that the transmission mechanisms over the post Bretton Woods period have been significantly different from standard theoretical assumptions.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-35
Number of pages36
Volume03
Publication statusPublished - 27 Oct 2003

Fingerprint

Nonstationarity
Real exchange rate
Parity
Bretton Woods
Germany
Savings
Transmission mechanism
Term structure of interest rates
International finance
Feedback effect
Uncovered interest parity
Cointegration analysis
Dynamic adjustment
Linkage
Trade deficit
Price adjustment
Real interest rate parity
Weak exogeneity
Purchasing power parity

Keywords

  • PPP
  • UIP
  • fisher parity
  • term structure
  • cointegrated VAR
  • cointegration

Cite this

Juselius, K., & Macdonald, R. (2003). International Parity Relationships and a Nonstationarity Real Exchange Rate: Germany Versus the US in the Post Bretton Woods Period. (12 ed.) (pp. 1-35). Glasgow: University of Strathclyde.
Juselius, Katarina ; Macdonald, Ronald. / International Parity Relationships and a Nonstationarity Real Exchange Rate : Germany Versus the US in the Post Bretton Woods Period. 12. ed. Glasgow : University of Strathclyde, 2003. pp. 1-35
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Juselius, K & Macdonald, R 2003 'International Parity Relationships and a Nonstationarity Real Exchange Rate: Germany Versus the US in the Post Bretton Woods Period' 12 edn, University of Strathclyde, Glasgow, pp. 1-35.

International Parity Relationships and a Nonstationarity Real Exchange Rate : Germany Versus the US in the Post Bretton Woods Period. / Juselius, Katarina; Macdonald, Ronald.

12. ed. Glasgow : University of Strathclyde, 2003. p. 1-35.

Research output: Working paperDiscussion paper

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N2 - This paper examines the interrelations between purchasing power parity, uncovered interest parity, the term structure of interest rates and the Fisher real interest rate parity condition using cointegration analysis. Dynamic adjustment and feed-back effects are estimated jointly in a full system of equations. An important finding is that the very slow, though significant, price adjustment towards sustainable levels of real exchange rates, has been compensated by corresponding changes in the spread of long-term bond rates. Related to this is the strong empirical support for the weak exogeneity of long-term bond rates, signifying the importance of the large US trade deficits (i.e. the low levels of US savings) and, hence, their linkage to international finance. Altogether, the results suggest that the transmission mechanisms over the post Bretton Woods period have been significantly different from standard theoretical assumptions.

AB - This paper examines the interrelations between purchasing power parity, uncovered interest parity, the term structure of interest rates and the Fisher real interest rate parity condition using cointegration analysis. Dynamic adjustment and feed-back effects are estimated jointly in a full system of equations. An important finding is that the very slow, though significant, price adjustment towards sustainable levels of real exchange rates, has been compensated by corresponding changes in the spread of long-term bond rates. Related to this is the strong empirical support for the weak exogeneity of long-term bond rates, signifying the importance of the large US trade deficits (i.e. the low levels of US savings) and, hence, their linkage to international finance. Altogether, the results suggest that the transmission mechanisms over the post Bretton Woods period have been significantly different from standard theoretical assumptions.

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Juselius K, Macdonald R. International Parity Relationships and a Nonstationarity Real Exchange Rate: Germany Versus the US in the Post Bretton Woods Period. 12 ed. Glasgow: University of Strathclyde. 2003 Oct 27, p. 1-35.