Original scientific paper
https://doi.org/10.1080/1331677X.2019.1642780
Does the covered interest rate parity fit for China?
Chi-Wei Su
; School of Economics, Qingdao University
Kai-Hua Wang
; Department of Finance, Qingdao University
Ran Tao
; Technological Center, Shandong Entry-Exit Inspection and Quarantine Bureau
Oana-Ramona Lobont
; Department of Finance, West University of Timisoara
Abstract
This paper aims to investigate whether the covered interest rate parity (C.I.P.) holds or not through examining the dynamic link between nominal interest rate differential (N.I.R.D.) and nominal exchange rate (N.E.R.) in China. With economic transitions and structural changes existing, we find that the C.I.P. condition using full-sample data does not always hold. Consequently, we apply a time-varying rolling-window approach to revisiting the dynamic causal relationship, and the results show that N.I.R.D. has both positive and negative impacts on N.E.R. in several sub-periods, and in turn, N.E.R. has the same effects on N.I.R.D. for China. Exchange regime reform, currency-specific market risk and capital control are considered in explaining the deviations in some subsample periods. Therefore, empirical results have important implications for distinguishing factors that bring about the C.I.P. deviations and further offers policy suggestions for the Chinese monetary authority
Keywords
Interest rate differential; exchange rate; rolling window; bootstrap; time- varying causality
Hrčak ID:
228882
URI
Publication date:
22.1.2019.
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