Departures from interest rate parity further evidence

Daily data are used to test the theory of interest parity between the Irish pound and three major currencies. The tests are carried out within the context of a model suggested by Pippenger (1978) and the statistical methodology used is spectral analysis. The Pippenger model emphasises the relaxation of two important implicit assumptions, the exogeneity of the interest differential and the assumed infinitely elastic supply of arbitrage funds, which have tended to characterise previous studies. We attempt to reconcile our results, which are generally supportive of interest parity, with the exchange control arrangements currently in force in Ireland.