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Do the Purchasing Power Parity and Uncovered Interest Parity conditions hold jointly?

April 26, 2017Conditions hold jointly parity purchasing power uncovered

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Do the Purchasing Power Parity and Uncovered Interest Parity conditions hold jointly?

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We employ the cointegration and Vector Error Correction methodology to explore exchange rate modelling in Ghana by considering the interactions between the goods and capital asset markets using monthly data spanning from 1997:1 to 2007:12. The empirical evidence supports a long-run relationship between prices, interest rates, and exchange rates in which the signs are consistent with the joint validity of the unrestricted PPP and UIP conditions. Further likelihood ration tests based on the cointegration vector show that the strict forms of the PPP and UIP conditions between Ghana and the USA do not hold as stationary relations. The findings suggest that the interactions between the goods and capital asset markets matter for the conduct of monetary policy and exchange rate modelling in Ghana.