Non-Stationary Interest Rate Differentials and the Role of Monetary Policy

URN to cite this document:: urn:nbn:de:bvb:355-epub-188543
DOI to cite this document:: 10.5283/epub.18854

Matros, Philipp ; Weber, Enzo

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Date of publication of this fulltext: 22 Dec 2010 06:42

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Abstract

The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. ...