ECEN’FLY there has been considerable interest in and investigations of whether the covered interest parity (CIP) holds. At the inicroeconomic level, CIP is important because is it a direct consequence of covered interest arbitrage. Its failure to hold would suggest 1) that markets are inefficient in the sense that traders do not take advantage of known profit opportunities, 2) that legal restri...

This paper analyses the importance attached to the past behaviour of the exchange rate when forming expectations and tests for the uncovered interest parity hypothesis. Using interest rate differentials for Uruguay over 1980-2010, we identify a strong and time-varying extrapolative component in exchange rate expectations. Agents attach more importance to the past behaviour of exchange rates the...

We evaluate the recent evidence for real interest parity (RIP), focusing on long-term yields. Examining the data on financial instruments of various maturities across the G-7 countries, we find substantial differences in the degree of real interest equalization measured at different horizons. In general, RIP holds better at long horizons than at short. This empirical result is robust to alterna...

This paper shows that even adjusted for the time-varying risk premiums implied by the yield curves across countries, uncovered interest parity is still strongly rejected by the data. Moreover, factors that predict the excess bond returns are found not significant at all in predicting the foreign exchange returns. These results reject the joint restrictions on the exchange rate and interest rate...

We model elasticity of volatility as a stochastic process with an eye to merge popular constant elasticity of variance (CEV) and stochastic volatility (SV) models in order to understand when it is appropriate to use absolute or relative changes or some intermediate transformation as well as to compare with more traditional autoregressive exponential stochastic volatility formulations. We descri...

The stock versus flow effect of the federal debt/deficit on a real interest rate is examined in a reduced-form equation. The evidence shows a positive and significant linkage between the federal debt and an ex-post, taxadjusted, short-term, real interest rate.

This paper challenges the commonly used unit root/cointegration approach for testing the Fisher effect for the economies of the G7 countries. We first prove that nominal interest and inflation rate can be better represented as being broken trend stationary variables. Later, we use the Bai-Perron procedure to show the existence of structural changes in the Fisher equation. When these characteris...

This paper analyses two well-known features of interest rates, namely their time dependence and their cyclical structure. Specifically, it focuses on the monthly Euribor rate, using monthly data from January 1994 to May 2011. Models based on fractional integration at the long run or zero frequency, although adequately describing the persistent behaviour of the series, do not take into account i...