Uncovered Interest Parity in Central and Eastern Europe: Expectations and Structural Breaks

16 Pages Posted: 11 Aug 2017

See all articles by Juan Carlos Cuestas

Juan Carlos Cuestas

University of Sheffield

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: September 2017

Abstract

This paper examines the empirical validity of the hypothesis of uncovered interest parity (UIP) using data from five Central and Eastern European countries with floating exchange rates for the period 2003 to 2014. The analysis includes forward‐looking as well as static expectations and allows for different types of structural break. The variable depicting the deviation from strict UIP is stationary when expectations are forward looking, suggesting that it is not possible to reject the UIP hypothesis with a constant risk premium. The deviation from strict UIP is however typically not stationary when expectations are static, even when structural breaks are incorporated, leading to the rejection of the UIP hypothesis with a constant risk premium. The results underscore the central role of expectations for the UIP hypothesis.

Keywords: Central and Eastern Europe, expectations, structural breaks, uncovered interest parity

JEL Classification: C32, F15

Suggested Citation

Cuestas, Juan Carlos and Filipozzi, Fabio and Staehr, Karsten, Uncovered Interest Parity in Central and Eastern Europe: Expectations and Structural Breaks (September 2017). Review of International Economics, Vol. 25, Issue 4, pp. 695-710, 2017, Available at SSRN: https://ssrn.com/abstract=3016703 or http://dx.doi.org/10.1111/roie.12280

Juan Carlos Cuestas (Contact Author)

University of Sheffield

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

Fabio Filipozzi

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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