Covered interest rate parity: the Australian case

In differentiating between long-run and instantaneous covered interest parity and in introducing domestic influences (proxied by unanticipated growth in the monetary base) as short-run determinants of domestic interest rates, this study sheds new light on the interest parity relationship in the Australian context. Indeed the results of the empirical tests indicate that previous studies have misspecified the dynamics of the relationship, omitted significant domestic influences, and consequently produced biased estimates.