ON THE EMPIRICAL VERIFICATION OF THE PURCHASING POWER PARITY AND THE UNCOVERED INTEREST-RATE PARITY

The long-run foreign transmission effects are first analyzed in a system of Danish and German prices, exchange rates and interest rates. The results gives emperical evidence of purchasing power parity between the countries as well as interest rate parity. The adjustment coefficients indicate that the prices do adjust although slowly but that the adjustment is primarily in the exchange rates. The deviations from these parities are used as determinants in the final econometric analysis of the determination of exchange rates, prices and interest rates in Denmark. The final model provides empirical evidence on the strong dependence of the Danish economy on the West German prices and interest rates in particular after 1983 with the deregulation of capital movements.