On the long and short run relationship between the forward rate and the interest parity |
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Authors: | George Pedersson Edward Tower |
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Affiliation: | MacMillan Bloedel Ltd., UK;Duke University University of Auckland, UK |
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Abstract: | The interest parity theory postulates that a one percentage point increase in the interest differential favoring a currency will be accompanied by an increase in the discount on that currency in the forward market of one percentage point as well. Using Canadian data we find that the forward rate responds to the interest differential with a lag. Moreover, a unit increase in the differential favoring the U.S. was accompanied in the long run by a rise in the discount on the forward U. S. dollar which was not significantly different from unity. |
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