Tests of exogeneity for long-run PPP and uncovered interest parity in an identified model of the United Kingdom effective exchange rate

Abstract

This article presents results for a model of the UK effective exchange rate over the period 1973q3 to 1991q4. A key feature is the identification of long-run behaviour and the role of tests of exogeneity in this context. As a consequence of the identification process, the article tests for Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) in the long-run, and defines a procedure for identifying long-run behaviour using an ordering based on the exogeneity status of variables. The order condition necessary for identification is augmented by conditions sufficient for global identification. The paper tests the over-identifying restrictions and for identifiability. The minimal set of cointegrating vectors includes a Fisher effect.