International Financial Relations Under the Current Float: Evidence from Panel Data
Open Economies Review, October 1998
21 Pages Posted: 7 Nov 2004
This paper uses multi-country data for the period 1973-1994 to investigate five key conditions in international finance- purchasing power parity, the Fisher equation, uncovered interest parity, and the equity-return analogues of the latter two. The results are largely consistent with theoretical expectations. Over the long run, purchasing power parity, uncovered interest parity and the Fisher effect prove to be rather good first approximations. The equity-return relations, though somewhat less so are nevertheless much better behaved than past studies would lead one to expect. Average rates of equity returns keep pace with inflation within countries in almost all instances; across countries, they are positively correlated with average rates of inflation. This is particularly the case when the data period is extended to include earlier decades.
Keywords: Fisher equation, purchasing power parity, uncovered interest parity, real stock returns
JEL Classification: E43, F31, G12
Suggested Citation: Suggested Citation