Problems of estimating the neutral interest rate: conclusions for Ukraine

Estimation of the actual and projected level of the neutral interest rate is a central issue in the application of modern monetary theory in the practical context of monetary policy. Views on the role and key drivers of neutral interest rates have evolved over time in parallel with the development of the theory of capital, money, credit and economic growth. Therefore, the paper is aimed at generalizing methods for assessing the neutral interest rate for open economies with emerging markets and formulating recommendations for improving the existing methodological tools for estimating the neutral rate in Ukraine. To achieve this goal, theoretical sources, advisory and research materials of international organizations, central banks and statistical databases were analyzed. It is established that the key issue of the current discussion about the tools for estimating the level of neutral interest rates in countries with small open economies is the relationship between the effects of external and internal factors. The paper identifies the advantages and disadvantages of the method for estimating the level of the neutral rate on the basis of uncovered interest parity rule used by the National Bank of Ukraine within the semi-structural macroeconomic model. The expediency of methodological tools introducing into the practice of monetary regulation of Ukraine for estimating the neutral rate of Ukraine based on the Laubach-Williams approach has been proved with adaptation to the conditions of an open economy, which will consider сinternal factors of economic development – changes in potential GDP and savings.

The Efficiency of the Polish Zloty Exchange Rate Market: The Uncovered Interest Parity and Fractal Analysis Approaches

The study of the effectiveness of the currency market is one of the most important research problems in the field of finance. The paper aims to assess the efficiency of the Polish zloty exchange rate market. We test the market efficiency by applying two independent approaches, one based on the Uncovered Interest Parity theory, and another based on the fractal analysis of exchange rates series. The research results show that the Uncovered Interest Parity holds only on the USD/PLN market. For EUR/PLN, JPY/PLN, CHF/PLN, MXN/PLN and TRY/PLN, the Uncovered Interest Parity hypothesis is rejected and implies the existence of the forward premium anomaly and market inefficiency. The estimated Hurst coefficient provides insight into the long-range dependence of exchange rates. The MXN/PLN, TRY/PLN and EUR/PLN exchange rates exhibit anti-persistent behaviours suggesting mean-reverting characteristics. For JPY/PLN and CHF/PLN, a high value of the Hurst exponent indicates long memory in the time series. Only for USD/PLN, we achieve the Hurst exponent closest to 0.5, which implies market efficiency. The research results obtained based on the UIP hypothesis and fractal analysis are consistent. The study reveals that the market efficiency hypothesis holds only for the most tradable Polish zloty currency pair, i.e., USD/PLN.

For Rich or for Poor: When does Uncovered Interest Parity Hold?

For Rich or for Poor: When does Uncovered Interest Parity Hold?

For Rich or for Poor: When does Uncovered Interest Parity Hold?

For Rich or for Poor: When does Uncovered Interest Parity Hold?

Is there Consumer Risk-Pooling in the Open Economy? The Evidence Reconsidered

We revisit the evidence on consumer risk-pooling and uncovered interest parity. Widely used single-equation tests are strongly biased against both. Using the full-model, Indirect Inference test, which is unbiased and has Goldilocks power according to Monte Carlo experiments, we find that both the risk-pooling hypothesis and its weaker UIP version are generally accepted as part of a full world DSGE model. The fact that the risk-pooling hypothesis, with its implication of strong cross-border consumer linkage, has passed this test with generally the highest p-value, suggests that it deserves serious attention from policy-makers looking for a relevant model with which to discuss international monetary and other business cycle policies.

Uncovered Interest Parity and Expected Depreciation in a Dollarized Cambodian Economy

This paper tests the Uncovered Interest Parity (UIP) for Cambodian economy using the Generalized Methods of Moment (GMM). GMM method is used to address the weak result of simple OLS method, including the problems of endoneneity, serial correlation, heteroskedasticity. The result showed that, during the period of exchange rate stability, UIP is not valid even the country is a very highly dollarized economy and people can save in both local currency and USD in domestic banks. The UIP coefficient is negative and significant for three-month and six-month interest rates. The negative coefficient suggests that the monetary policy that tries to decrease interest rate (increase) may face the risk of currency depreciation (appreciation). If local currency depreciation is the driving force of dollarization, reducing local interest rate will encourage more dollarization in the economy.