The validity of uncovered interest parity: Evidence from african members and non-member of the organisation of petroleum exporting countries (OPEC) |
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Affiliation: | 1. City University of Hong Kong, Hong Kong;2. Lingnan College, Sun Yat-Sen University, China |
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Abstract: | This paper re-examines uncovered interest parity (UIP) puzzle using Africa where there is dearth of studies. It extends the previous literature in the following ways. It captures the heterogeneity (oil and non-oil sources of shocks) in the region by considering both African members of the Organisation of Petroleum Exporting Countries- OPEC (Algeria, Nigeria and Angola) and non-member (South Africa) to ensure generalisation of findings. It also explores asymmetric exchange rate responses to diverse monetary policy stances from a new dimension by explicitly measuring asymmetries and capturing long- and short-run dynamics using the new non-linear autoregressive distributed lag (NARDL) and asymmetric component AC-GARCH models along with other recent methods for results' robustness. Results from alternative methods show that UIP fails to hold in the African members and non-member of OPEC which is attributable to capital mobility restrictions and currency risk. However, asymmetric and permanent/transitory exchange rate response to monetary policy stances was noticed with little evidence of risk premium dynamics and role of price level instability in UIP validity. |
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Keywords: | Uncovered interest parity Non-linear approaches Extreme sampling method African OPEC and non-OPEC members A-C-GARCH C22, E43, F31, G12 |
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