RDP 9203: Real Exchange Rates and the Globalisation of Financial Markets Tables
March 1992
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Real Exchange Rates | Real Long-Term Interest Differential | Cumulated Current Balances | |
---|---|---|---|
Yen/$ | −1.6 | −1.7 | −0.5 |
DM/$ | −2.2 | −1.9 | −0.05 |
£/DM | −1.9 | −1.6 | −1.3 |
FF/DM | −4.1^{*} | −1.2 | 1.1 |
Note: The augmented Dickey-Fuller (ADF) unit root statistic is employed to test the null hypothesis that the variable concerned possesses a unit root. Critical values are reported in Fuller (1976), Table 8.5.2. An asterisk denotes rejection of the null hypothesis at the 5 per cent level. |
Eigenvalues λ |
Conditiobr nal Hypothesis Max λ Tests |
Unconditional Hypothesis Trace Tests |
Long-run Coefficients | ||||
---|---|---|---|---|---|---|---|
Real Interest Differential R^{*}−R | Cum. Current Account Surplus | ||||||
yen/$ | 0.000 | Ho:r=2 | 0.0 | Ho:r≤2 | 0.0 | ||
0.224 | Ho:r=1 | 17.2^{**} | Ho:r≤1 | 17.2^{**} | 0.125 | −0.585 | |
0.319 | Ho:r=0 | 26.1^{**} | Ho:r≤0 | 43.4^{**} | 0.027 | −0.302 | |
DM/$ | 0.005 | Ho:r=2 | 0.4 | Ho:r≤2 | 0.4 | ||
0.073 | Ho:r=1 | 5.1 | Ho:r≤1 | 5.5 | |||
0.212 | Ho:r=0 | 16.2 | Ho:r≤0 | 21.6 | −0.008 | −0.102 | |
FF/DM | 0.002 | Ho:r=2 | 0.1 | Ho:r≤2 | 0.1 | ||
0.072 | Ho:r=1 | 5.0 | Ho:r≤1 | 5.1 | |||
0.393 | Ho:r=0 | 33.5^{**} | Ho:r≤0 | 38.6^{**} | 0.007 | −0.043 | |
£/DM | 0.001 | Ho:r=2 | 0.1 | Ho:r≤2 | 0.1 | ||
0.092 | Ho:r=1 | 6.6 | Ho:r≤1 | 6.7 | |||
0.279 | Ho:r=0 | 22.3^{**} | Ho:r≤0 | 28.9^{*} | 0.064 | −0.426 | |
Note: The conditional maximum eigenvalue test is based on the largest squared eigenvalue. The unconditional trace test is based on the null hypothesis that there are k or less cointegrating vectors. Critical values are given in Johansen and Juselius (1990). One asterisk denotes rejection of the null hypothesis at the 10 per cent level and two asterisks denotes significance at the 5 per cent level. |
Measure | Context | Test Equation Typically Used | Definitions | Perfect Capital Mobility Null Hypothesis |
---|---|---|---|---|
1 Closed interest parity |
a) Same currency b) Different country (i.e. “onshore”-“offshore”) |
i = α_{1}+β_{11}i^{*}+β_{12}(prp) | i = Domestic interest rate i^{*} = Foreign interest rate prp = Political risk premium |
α_{1} = 0 β_{11} = 1 β_{l2} = 0 |
2 Covered interest parity (CIP) |
a) Different currency b) Same or different country c) Investors cover themselves in the forward market |
i = α_{2}+β_{21}i^{*}+β_{22}(fpd)+β_{23}(prp) | fpd = Forward premium or discount | α_{2} = 0 β_{21} = β_{22} = 1 β_{23} = 0 (Required if different country) |
3 Uncovered interest parity (UIP) |
a) Different currency b) Same or different country c) Investors take open positions in foreign currency |
i = α_{3}+β_{31}i^{*}+β_{32}E(ΔS)+β_{33}(prp)+β_{34}(erp) | erp = Exchange risk premium E(ΔS) = Expected change in the spot exchange rate |
α_{3} = 0 β_{31} = β_{32} = 1 β_{33} = 0 (Required if different country) β_{34} = 0 (Risk neutrality) |
4 Real interest parity |
a) Different currency b) Same or different country c) Different commodity bundles d) Investors take open positions in foreign currency |
R = α_{4}+β_{41}R^{*}+β_{42}E(ΔRS)+β_{43}(prp)+β_{44}(rerp) | R = Domestic real interest rate R^{*} = Foreign real interest rate E(ΔRS) = Expected change in the real exchange rate rerp = Real exchange rate risk premium |
α_{4} =0 β_{41} = 1 β_{42} = 0 Because E(ΔRS) = 0) β_{43} = 0 (Required if different country) β_{44} = 0 (Risk neutrality) |
5 Independence of domestic saving and investment ratios |
See Section 3 of paper for further discussion | (I/Y) = α_{5}+β_{51}(NS/Y) (I/Y) = a−bR+u |
I = Investment NS = National saving Y = GNP u = Other factors affecting domestic investment other than R |
β_{51} = 0, all conditions required for 4 i.e. R=R^{*} and, in addition, R^{*}exogenous, ρ(u,NS/Y) = 0, and no non-traded goods |
Note: This table summarises algebraically the various definitions of international financial market integration which have been proposed and sets out the conditions required to be fulfilled by each definition if capital markets are indeed fully integrated (refer to column entitled “Perfect Capital Mobility Null Hypothesis”). Uncovered interest parity (UIP) is rarely tested in the full form in which it is presented in the table. The table serves to highlight the number of hypotheses that are required to be maintained for the Feldstein-Horioka national savings-investment measure to be a valid measure of the degree of international financial market integration. |
First Period | Second Period | Third Period | ||||
---|---|---|---|---|---|---|
α | γ | α | γ | α | γ | |
Japan | 0.595 (10.17) |
0.316 (4.48) |
0.659 (8.14) |
0.291 (2.93) |
0.357 (2.04) |
0.634 (6.36) |
Germany | 0.219 (4.12) |
0.199 (1.15) |
0.900 (25.77) |
0.022 (0.60) |
0.548 (7.24) |
0.595 (5.64) |
France | −0.16 (1.34) |
0.566 (3.50) |
0.54 (4.46) |
0.424 (3.31) |
1.27 (17.72) |
0.007 (0.09) |
Italy | −0.40 (2.78) |
0.944 (7.20) |
1.77 (28.95) |
−0.500 (5.26) |
1.65 (25.18) |
−0.261 (2.48) |
United Kingdom | −0.54 (1.55) |
1.920 (3.01) |
0.425 (4.11) |
0.730 (8.00) |
0.824 (10.68) |
0.757 (7.41) |
Canada | 0.480 (5.54) |
1.374 (14.75) |
0.860 (8.99) |
0.397 (3.40) |
0.874 (6.49) |
0.524 (2.63) |
Netherlands | −0.046 (0.27) |
0.937 (2.69) |
1.004 (9.52) |
−0.064 (0.58) |
1.155 (6.14) |
0.189 (0.79) |
Switzerland | 0.406 (2.91) |
1.024 (3.51) |
0.408 (7.15) |
0.059 (0.89) |
0.175 (1.48) |
0.739 (5.3) |
Note: See Annex for an explanation of the model used. The hypothesis that foreign and domestic ex ante real rates move together and thus that the domestic and foreign markets are completely integratedimplies γ=1. γ =0 implies complete disintegration. The first, second and third periods are August 1974 to October 1979, November 1979 to February 1990 and January 1986 to February 1990, respectively. |
First Period | Second Period | Third Period | ||||
---|---|---|---|---|---|---|
α | γ | α | γ | α | γ | |
France | 0.357 (5.13) |
0.476 (2.52) |
0.645 (2.25) |
0.331 (1.02) |
0.827 (3.69) |
0.363 (1.68) |
Italy | 0.758 (3.66) |
−0.398 (1.81) |
1.361 (8.84) |
0.058 (0.35) |
1.305 (7.96) |
0.083 (0.50) |
United Kingdom | −1.745 (7.26) |
3.27 (4.27) |
1.351 (3.76) |
−0.383 (0.91) |
0.460 (3.26) |
0.865 (6.00) |
Netherlands | −0.732 (7.77) |
1.301 (12.32) |
0.356 (1.70) |
0.699 (2.97) |
0.162 (1.77) |
1.014 (10.91) |
Switzerland | 0.031 (0.79) |
0.966 (6.73) |
−0.399 (1.65) |
0.923 (3.50) |
−0.487 (8.98) |
1.101 (17.28) |
Note: See Annex for an explanation of the model used. The hypothesis that foreign and domestic ex ante real rates move together and thus that the domestic and foreign markets are completely integrated implies γ = 1. γ = 0 implies complete disintegration. γ =1 and α =O imply equality of domestic and foreign rates. |