Uncovered Interest Rate Parity and Monetary Convergence of Potential EMU Accession Countries
Posted: 20 Jul 2017
Date Written: 2005
This paper analyzes deviations from uncovered interest rate parity which are interpreted as indicator of the substitutability of currencies. Backward recursive statistical tests and error correction models are applied to study the co-movement of interest rates, and rolling regressions are used to study size and volatility of country specific risk premiums. In accordance to their degree of monetary integration with the Euro area, new EU members and accession countries are divided into three groups. Estonia and Lithuania seem to exhibit the highest degree of monetary integration with the Euro area.
Keywords: Cointegration, economic convergence, European monetary union, monetary integration, interest rate parity, risk premium
JEL Classification: C22, C32, F36, F41
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