Do Purchasing Power and Interest Rate Parities hold for the EUR/HUF exchange rate?

Erdey, L. and Földvári, P. (2009) Do Purchasing Power and Interest Rate Parities hold for the EUR/HUF exchange rate? Acta Oeconomica, 59 (3). pp. 289-306. ISSN 0001-6373

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Abstract

In this article we carry out a time-series analysis on monthly HUF-EUR exchange rate data using both the Engle-Granger and Johansen methodology in order to find evidence for Purchasing Power and Uncovered Interest Rate Parities. Our results confirm that the producer price indices and the exchange rates are co-integrated with two co-integration vectors. Unlike the bulk of empirical literature that finds a quite sluggish adjustment of exchange rates, our estimate of the half-life from the Hungarian data is around 5 months only. Additionally, we find that when both PPP and UIP are included in the model, we cannot reject the hypotheses of proportionality and symmetry at 10%, while rejection is possible at 5%.

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