A translation method which provides comparability is easily found using the interest rate parity
interest rate parity
provides an answer to the question of how to
This approach is similar in spirit to several studies that have examined the risk-premium explanation of deviations from interest rate parity
(see, e.g., Kaminsky and Peruga (1990), McCurdy and Morgan (1991), Chiang (1991), Korajczyk and Viallet (1992), Malliaropulos (1997), and Morley and Pentecost (1998)).
This model outlines the conditions which determine the net effect of the controls on the country's deviation from interest rate parity
. I then conduct an intervention analysis, as in Box and Tiao , to investigate the effect of the imposition of Mexican capital controls of August 1982.
We first show analytically the forward rate and spot rate determination and the rationale for FUH under risk neutral assumption and interest rate parity
for buyers of forward currency.
Since it is found thus far that neither Purchasing Power Parity or Interest Rate Parity
alone or combined determines exchange rates, there are other variables that are unique in determining exchange rates for different countries.
First, we wanted to demonstrate that real interest rate parity
and the underlying parity conditions, uncovered interest parity, ex ante PPP, and the Fisher relation in each country, imply that, if any one of the variables is integrated of order one or I(1), then the four must share a single common trend if RIP is to be a valid long-run characterization of the data.
In the above equation the expectation about the expected exchange rate was based on interest rate parity
. Other studies employed purchasing power parity(Berk & Knot, 2001).
Real interest rate parity
is not suitable because an investor most likely will not compare the nominal returns from different countries in terms of the expected purchasing power over that country's goods.
We also categorize segmentation into "severe" or "mild" types, depending on whether uncovered interest rate parity
(UIRP) is violated or not.
When capital is perfectly mobile equation (7) becomes the familiar uncovered interest rate parity
Interest Rate Parity
(IRP) shows a theoretical relationship existing between the short-term interest rates of two countries and foreign exchange rates, and it is an arbitrage condition that must hold when international financial markets are in equilibrium (Eun & Resnick, 2007).