On the Joint Test of the Uncovered Interest Parity and the Ex‐ante Purchasing Power Parity

This study revisits the relation between the uncovered interest parity ( UIP ), the ex‐ante purchasing power parity ( EXPPP ) and the real interest parity ( RIP ) for the UK and Japanese vs US data. The original contribution is on developing some joint coefficient‐based tests, obtained by rewriting the UIP , the EXPPP and the RIP as a set of cross‐equation restrictions in a vector autoregression ( VAR ) framework. Test results point to a “forward premium” bias in both the UIP and the EXPPP . The latter result is novel in the literature and stems from testing the PPP in expectational terms. Moreover, the results suggest a currency‐dependent pattern for the UIP , contrarily to the EXPPP equation. Finally, it is shown that conditioning the VAR on M 3 growth differential has important explanatory power in resolving the aforementioned biases in both the UIP and EXPPP equations for the UK vs US data. At the same time, variables having a strong forward‐looking component (i.e. share prices) help recover a unitary coefficient in the UIP equation.