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The real interest rate parity hypothesis : an investigation for developed and emerging markets

Ferreira, Alex Luiz (2005) The real interest rate parity hypothesis : an investigation for developed and emerging markets. Doctor of Philosophy (PhD) thesis, University of Kent. (doi:10.22024/UniKent/01.02.94345) (KAR id:94345)

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This study investigates the existence and causes of real interest rate differential(s) \rid(s) hereafter] across a heterogeneous sample of countries. This is relevant for various reasons. First, the research sheds some light on the extent to which economic authorities are able to pursue independent monetary policy in an open-economy, at least in the short-run. Second, it unveiled interesting characteristics of the dynamics of interest rate differentials. This is important because an indebted economy experiencing persistent rids is prone to face default. Finally, rids indicated the extent of market integration between economies.

The adjustment of rids to equilibrium is found to be fast in both emerging and developed economies, a finding that is compatible with the Real Interest Rate Parity Hypothesis. The equilibrium in emerging economies, however, is statistically different from zero pointing out to frictions in either goods or assets markets.

We found that the general causes of the differentials are UIP deviations and nominal interest rate differentials. The more specific causes are: 1) persistent reaction of monetary policy to changes in prices and slow adjustment in interest rates; 2) systematic excess returns, possibly induced by anticipated changes in macroeconomic fundamentals and sticky bond prices; 3) large unexpected changes in exchange rates driven by unexpected changes in macroeconomic fundamentals; 4) risk premium. Monetary policy resistance to price and exchange rate changes introduces an element of persistence in equilibrium nominal interest rate differentials which can explain excess returns, in other words, the fact that high interest rates are associated with appreciating exchange rates. Fundamentals can explain excess returns on the basis of systematic excess returns due to interest rate smoothing (sticky bond prices), or large forecast errors associated with unexpected changes in exchange rates. The evidence presented also points out to risk premium as another determinant of bond spreads and, hence, the cause of rids.

Item Type: Thesis (Doctor of Philosophy (PhD))
Thesis advisor: Leon-Ledesma, Miguel A.
Thesis advisor: Vickerman, Roger W.
DOI/Identification number: 10.22024/UniKent/01.02.94345
Additional information: This thesis has been digitised by EThOS, the British Library digitisation service, for purposes of preservation and dissemination. It was uploaded to KAR on 25 April 2022 in order to hold its content and record within University of Kent systems. It is available Open Access using a Creative Commons Attribution, Non-commercial, No Derivatives ( licence so that the thesis and its author, can benefit from opportunities for increased readership and citation. This was done in line with University of Kent policies ( If you feel that your rights are compromised by open access to this thesis, or if you would like more information about its availability, please contact us at and we will seriously consider your claim under the terms of our Take-Down Policy (
Subjects: H Social Sciences
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
SWORD Depositor: SWORD Copy
Depositing User: SWORD Copy
Date Deposited: 27 Oct 2022 15:15 UTC
Last Modified: 27 Oct 2022 15:15 UTC
Resource URI: (The current URI for this page, for reference purposes)

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