Parity relationships in transition economies
Subtitle: PPP and interest rate parity in the Baltic states and Russia
By: Sindre Sorbye ; supervised by Mike Bowe.
Contributors: Bowe, Mike.; School of Management.
Publisher: UMIST
Published: 1997
Place of publication: Manchester
Language: eng
Description: ABSTRACT
An analysis of purchasing power parity (PPP), uncovered interest parity (UIP) and real interest parity (RIP) in the Baltic states and Russia is conducted by applying unit root tests and the Johansen cointegration procedure. RIP and ex post UIP in a modified form are largely supported by the empirical results. When allowing for a constant risk premium, UIP holds both in Lithuania and Russia. Similarly, if assuming a constant real interest differential, prices and nominal interest rates largely adjust according to RIP in the Baltic republics. PPP, by contrast, is strongly rejected, and all the currencies in question have experienced a significant real appreciation against the Deutschemark during the sample period. This phenomenon can be attributed to the transition process taking place. When a proxy for the level of economic development, the internal price ratio -  the ratio of prices of nontradables to those of tradables - is taken into account, much more satisfactory results are obtained for the Baltic republics. Furthermore, past values of the internal price ratio provide information about Baltic future real exchange rates. Evidence also suggest that the oil price is a significant real exchange rate determinant in the cases of Russia and Latvia. The rate of real exchange rate appreciation is now slowing down in most transition economies, and as the efficiency of financial intermediation increases, thereby lowering nominal interest margins, local financing should appear more attractive to foreign investors. The results suggest that Estonia currently provides the best opportunities for host country financing.
Notes: Thesis number: 13344.

MSc.