Date of Award

1-1-2002

Document Type

Thesis

Publisher

Edith Cowan University

Degree Name

Master of Business

School

School of Finance and Business Economics

Faculty

Faculty of Business and Public Management

First Supervisor

Professor David Allen

Second Supervisor

Associate Professor Abul Mansur Masih

Abstract

The current high exchange rate volatility in the face of globalization, underpinned by growing trade and financial and commodity markets liberalization has attracted the resurgence of considerable interest from both financial economists and policy makers, into the validity of international parity relationships. Using multivariate cointegration framework and long run structural modelling, this paper investigates the evidence in support of two of the parity relationships that underpin either implicitly or explicitly much of international macroeconomics. The first is the purchasing power parity (PPP) hypothesis or the theorem that there exists an invariable long-run equilibrium real exchange rate. The second is the uncovered interest rate parity (UIP) theorem, a hypothesis, which implies that yields of domestic and foreign financial assets (real interest rates) can differ only by the expected change in the price of foreign exchange. These tests are conducted on 8 of the 14 SADC economies using South Africa and United States as numeraires for the post- Bretton era; for the intra-continental and the intercontinental approaches respectively. All tests generally suggest that regardless of the approach used, there is significant evidence supporting cointegration, when the PPP is tested in its simple form and when the joint PPP and UIP hypothesis is tested. Except for a few countries, results are less favourable when the simple UIP is tested. We are therefore able to conclude that the simple PPP and joint PPP and UIP variables are cointegrated or that they do move together in the long-run for most countries indicating that the propositions are valid. However, most of the estimated cointegrating vectors rejected the restrictions of symmetry and proportionality implied by the PPP and UIP theories. With the simple UIP our conclusion is that support is sample dependent as the UIP generally holds only for those countries with very strong economic ties and whose currencies are pegged one to one.

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