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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Dynamic Analysis of Covered Interest Rate Parity Disequilibrium Error

Vol.21, No.2, June , 61–86


English Version |  Korean Version
  •   (Dankook University)

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Abstract  

This paper analyzes the dynsmics and determinants of disequilibrium error in the covered interest parity (CIP) thrpough the transformed error correction model following Kim and Park (2008), Kim (2008, 2009), Kim and Park (2008) and Kim (2009). According to the dynamic analyses including impulse response analyses and Granger causality test, I found the CIP disequilibrium error may be mainly caused not by the foreign exchange rate part but by the domestic and foreign interest part. However the dynamic effect of the CIP error to the interest rates and exchange rates was not meaningful. These results imply that there may be restrictions to hinder the arbitrage transaction to clear the CIP disequilibrium quickly. A restriction to this direction is the credit risk of Korean financial market and any policy reaction to reduce it may be necessary. For instance, any effort to inform the sound fundamentals of Korean economy in the international financial markets may be useful.


Keywords
   Dynamic Analysis of Covered Interest Rate Parity Disequilibrium Error

JEL classification codes
   C3, F4
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