Uncovered Interest Parity in Central and Eastern Europe: Convergence and the Global Financial Crisis

Discussions on Estonian Economic Policy: Theory and Practice of Economic Policy, Vol. 20, No. 1 (2012)

25 Pages Posted: 19 Dec 2012

See all articles by Fabio Filipozzi

Fabio Filipozzi

Bank of Estonia; Tallinn University of Technology (TUT) - Finance & Banking

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics; Bank of Estonia

Date Written: June 15, 2012

Abstract

This paper presents tests of uncovered interest parity in Croatia, the Czech Republic, Hungary, Poland and Romania; all countries in Central and Eastern Europe with floating exchange rates. Data are monthly and the trading horizon is three months. The estimations show that the UIP hypothesis is rejected for the full sample from 1999 to 2011 for all five countries. A number of reasons for the rejection were investigated. Rolling regressions show that standard versions of the UIP essentially lose all explanatory power in 2008-10, which was a period in which the global financial crisis led to instability in currency and interest markets in Central and Eastern Europe. Two indicators of global risk aversion were also found to enter significantly in the many UIP estimations. Finally, the size of the interest rates spread also seems to be of importance, at least for Poland and Romania.

Keywords: UIP, financial integration, global financial crisis, Central and Eastern Europe

JEL Classification: E43, F36, G01, G15

Suggested Citation

Filipozzi, Fabio and Staehr, Karsten, Uncovered Interest Parity in Central and Eastern Europe: Convergence and the Global Financial Crisis (June 15, 2012). Discussions on Estonian Economic Policy: Theory and Practice of Economic Policy, Vol. 20, No. 1 (2012), Available at SSRN: https://ssrn.com/abstract=2190996

Fabio Filipozzi (Contact Author)

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

Tallinn University of Technology (TUT) - Finance & Banking ( email )

Estonia

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics ( email )

Akadeemia tee 3-486
Tallinn, 12618
Estonia

HOME PAGE: http://www.ttu.ee/karsten-staehr

Bank of Estonia ( email )

Estonia Building 13
Tallinn, 15095
Estonia

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